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Real Estate Investing

Break Even Ratio, Explained



There are a lot of ratios to look at when investing in real estate, and it can get confusing. One of the lesser used but still important ratios is the break-even ratio.

The Break Even Ratio answers the question:

At what occupancy rate am I breaking even?

Good question to know the answer to, right?

Additionally, it allows lenders and other investors to assess the rental property for its ability to meet its operating expenses, debt service, and provide a level of profit.

Break Even Ratio Formula

To calculate the break even ratio, simply take the debt service + operating expenses – any reserves and divide by the gross operating income.

Break Even Ratio Example

Let’s say a given property has an annual debt service of $15,000 and it’s annual operating expenses are $12,000. The total yearly expenses for this property amounts to $27,000.

Now, let’s say this property has a gross income of $33,000 (not to be confused with the net operating income).

Total Expenses / Gross Income = Break Even Ratio

$27,000 / $33,000 = 81.8%

So, you need roughly 82% occupancy to break even and cover your expenses.

Break Even Ratio vs Debt Service Coverage Ratio

The DSCR and BER are clearly related. As you might remember, the debt service coverage ratio is the NOI / Debt service. It is the relationship between the NOI and Debt Service.

The break-even ratio is the relationship between all costs and income.

So, these are very closely related but answer slightly different questions.

The DSCR lets a lender know the borrower’s ability to pay the debt service. So, a DSCR of 1.25 means the borrower net income is 25% more than all of the operating costs (including debt service). They could lose 25% of their NOI and still cover the debt service.

The break even ratio is slightly different. It tells you how much of your gross income you can lose in order to break even.

So, the debt coverage ratio compares net income to the mortgage. Break even ratio compares gross income to total expenses.

When To Use Break Even Ratio

The break even ratio is important for both investors and lenders. It’s used to know what occupancy level you require in order to still cover your bills.

For example, if your break even ratio is 92%, an investor or lender may feel this deal is shaky because of the high occupancy required to keep the building afloat. It’s really common for occupancy levels to drop below 90%, especially during a recession.

On the other hand, if the break-even ratio is 75%, an investor or lender would be far more confident in the deal knowing that during the worst case scenario of a 25% vacancy rate, the property could still cover all of its expenses and obligations.

Additionally, investors may analyze a deal by looking at the break-even occupancy rate both at acquisition and after the building is remodeled and stabilized.

For example, if we are buying a deal with a heavy rehab component, we might expect it is currently underwater or barely breaking even. So, a break even occupancy of 95% or even over 100% would be expected.

We could project out one or two years and look at what the stabilized property would look like, and determine the break even occupancy at that point. Let’s say that in year two, the break even ratio is a much healthier 82%, so we might choose to take this deal.

On the other hand, if we did all this remodeling and work and the break even ratio was 90%, we might reconsider investing in the deal.

Break Even Ratio Rule of Thumb

As a general rule of thumb, lenders will look for a break even ratio of 85% or less. Just like everything else in real estate, this number fluctuates and depends on the lender and property, but a ratio under 85% is good.

This means the total rent collected can drop by 15% and you still can cover all of the bills. That’s pretty good for income producing property.

Analyzing Real Estate Deals

When analyzing your rental property deals, there are a number of metrics you’ll want to use to determine if it’s a good deal.

First, you want to know what it will be worth when any upgrades or rehab is completed. This is called the After Repair Value. You calculate this by doing a comparative market analysis (if it’s a smaller deal) or by using capitalization rates (if it’s a larger deal).

The next thing you want to look at is the average cash on cash return as well as the overall return on investment over the timeframe of the deal. You’ll want to look at the in-place cash on cash return day 1 and compare it to the cash on cash return once the work is complete and rents are pushed.

You do this because you want to walk into a cash flowing property day one, then add value. It’s a lot harder to buy something that is cash flow negative and turn it around.

This is where you’ll look at the break even ratio to see how the deal performs both day 1 and after it’s stabilized.

Now, you’ll want to look at overall financing and how that affects your returns. This is where the debt coverage ratio comes into play. If the DSCR is too low, you’ll get less loan proceeds which means higher cash out of pocket and lower cash on cash returns.

With all of this information, you can make an informed decision to buy or not to buy.

This article originally appeared on IdealREI.  Follow them on Facebook, Instagram and Twitter.


Featured image: Image by Steve Buissinne from Pixabay

Real Estate Investing

5 Recession-Proof Investments for Your Portfolio



By Sheryl Chapman
As we all know, the economy can be unpredictable at times. Recession is a common phenomenon that can affect the investments in your portfolio.

But don’t worry, there are some sectors that are likely to perform well—even during a recession. Here are five recession-proof investments that you can consider adding to your portfolio.

(Editor’s note***********:************ If you wanna learn how to start investing for retirement, check out the free lessons inside the academy! 📺)*

1. Consumer staples

Consumer staples are products that are essential to our daily lives, such as food, household goods, and personal care items.

These products are in constant demand, regardless of the economic climate. Companies that produce these items, such as Procter & Gamble and Coca-Cola, are considered recession-proof investments.

These companies have a stable revenue stream that can weather economic downturns.

2. Utilities

Utilities are another recession-resistant investment. People need electricity, gas, and water, regardless of the state of the economy.

Utility companies, such as Duke Energy and American Electric Power, have a steady stream of revenue and provide investors with a reliable source of income.

3. Healthcare

The healthcare industry is recession-proof because it provides essential services that people cannot do without. Companies that provide healthcare services or products, such as Johnson & Johnson and UnitedHealth Group, are likely to remain profitable during a recession.

4. Gold

Gold is a safe-haven investment that many investors turn to during times of economic uncertainty. Gold prices tend to rise during recessions because it is seen as a store of value. Investors can buy physical gold, gold ETFs, or invest in gold mining stocks.

GUIDE: 3 Ways To Invest In Gold In 3 Minutes Or Less 🔑📲

5. Treasury bonds

Treasury bonds are considered to be one of the safest investments during a recession.

These bonds are issued by the US government and are backed by the full faith and credit of the government. Treasury bonds provide a fixed income and are considered to be a low-risk investment.

In conclusion, these five investments are considered to be recession-proof because they provide essential products or services that people cannot do without.

Adding these investments to your portfolio can provide stability during times of economic uncertainty.

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Real Estate Investing

5 Tips To Pricing Your Airbnb Listing For Maximum Profits



Airbnb has revolutionized the travel industry by providing an affordable and unique way for travelers to experience different destinations.

With over 7 million listings worldwide, it’s safe to say that Airbnb has become one of the most popular ways for travelers to find lodging.

However, as a host, one of the most challenging decisions you’ll face is determining the right price for your listing.

Pricing your Airbnb listing correctly is critical to your success as a host, as it can make or break your profitability.

Here are some tips to help you price your Airbnb listing for maximum profit:

Know Your Market

Before you set your price, it’s essential to research the market in your area. Look at other listings in your neighborhood, paying attention to the size of the property, amenities, and location. Check the availability of your competitors and the average price they charge. This information will help you determine your pricing strategy and ensure that your listing is competitive.

Consider Seasonal Demand

Seasonal demand plays a significant role in the pricing of your Airbnb listing. During peak seasons, such as holidays, festivals, and major events, you can charge higher rates. Conversely, during low seasons, you’ll need to lower your prices to attract guests. Keep track of events happening in your area and adjust your prices accordingly.

Offer Discounts

Offering discounts is an effective way to attract guests and increase your occupancy rate. Consider offering discounts for extended stays, early bookings, or last-minute reservations. You can also offer discounts to guests who leave a positive review or refer new guests to your listing.

Calculate Your Costs

To ensure that your pricing strategy is profitable, you need to calculate your costs. Take into account expenses such as cleaning fees, utilities, maintenance, and taxes. Factor in your time and effort as well. Your goal is to set a price that will cover all your costs while still allowing you to make a profit.

Be Flexible

Finally, be flexible with your pricing strategy. Test different prices and see how they affect your occupancy rate and profitability. Monitor your competition regularly and adjust your prices accordingly. Remember that the market is constantly changing, and your pricing strategy needs to adapt to stay competitive.

In conclusion, pricing your Airbnb listing for maximum profit is a crucial aspect of your success as a host. By researching your market, considering seasonal demand, offering discounts, calculating your costs, and being flexible, you can set the right price for your listing and maximize your profitability.

Happy hosting!

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Real Estate Investing

3 Ways To Turn Your Room Into Money-Making Airbnb Business



Are you looking for a way to earn some extra cash? Have you considered turning your spare room into a money-making Airbnb business?

With just a few simple steps, you can create a cozy and welcoming space that guests will love. In this article, we’ll explore three ways to get started on your journey to becoming an Airbnb host.

Here are three steps to get started TODAY.☕️🏠💰

1. Prepare Your Space: Before you start accepting guests, you need to make sure your space is guest-ready. This means cleaning thoroughly, providing fresh linens and towels, and decluttering the space.

PRO TIP: You may also want to consider adding personal touches like fresh flowers or a welcome basket to make guests feel at home.

Here’s a growth hack from the Airbnb lecture inside the academy: “A nice personal touch like a letter or a note can go a LONG way.”

Oh, by the way…he makes $500K/month from his Airbnb side hustle. (Watch it for free here.)

2. Create Your Listing: Once your space is ready, it’s time to create your Airbnb listing. (Here’s a guide on how to do this in 10 minutes. AND it pays you $25.)

This is where you’ll showcase your space and attract potential guests. Make sure to include high-quality photos, a detailed description of your space and amenities, and accurate pricing information.

You may also want to consider offering discounts for longer stays or adding extra perks like free breakfast or use of a pool.

3. Manage Your Guests: Once your listing is live, you’ll start receiving inquiries and bookings. It’s important to communicate promptly and clearly with guests to ensure a positive experience for everyone.

Make sure to answer any questions they may have and provide detailed check-in instructions.

During their stay, make sure to be available to address any issues that may arise and provide recommendations for local attractions and restaurants.

With these steps, you can turn your spare room into a profitable Airbnb listing and start earning extra income. Happy hosting!

Editor’s Note: If you want a step-by-step coaching session on how to set up your own $100K+ Airbnb side hustle, you can do so here. $49. Limited time only.

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