How full does your rental have to be just to pay its bills? Here is the formula, and two deals where the answer is very different.
Break-even occupancy is the percentage of the year your rental must be rented, at full rent, to cover its operating expenses and its loan payment. Under that line you lose money every month. Above it you profit.
It is a vacancy stress test in one number. An 86% break-even means the unit can sit empty only 14% of the year before cash flow goes negative.
Step 1: Add up yearly operating expenses: property taxes, insurance, management, maintenance reserve and any HOA.
Step 2: Add 12 months of loan payments (principal and interest).
Step 3: Divide the total by yearly rent at full occupancy (monthly rent × 12).
The same two deals from our DSCR guide. Both use a 30-year loan at 7%.
| Deal A | Deal B | |
|---|---|---|
| Monthly rent (full) | $2,500 | $2,000 |
| Operating expenses / mo | $820 | $645 |
| Loan payment (P&I) / mo | $1,331 | $898 |
| Total to cover / mo | $2,151 | $1,543 |
| Break-even occupancy | 86.0% | 77.2% |
| Vacancy it can absorb | 14.0% (about 51 days a year) | 22.8% (about 83 days a year) |
| DSCR | 1.17 | 1.40 |
Deal A: $2,151 ÷ $2,500 = 86.0%. Deal B: $1,543 ÷ $2,000 = 77.2%.
Both deals make money at the planned 5% vacancy. The difference is the cushion. Deal A can lose about seven weeks of rent in a year before the cash flow is gone. Deal B can lose nearly twelve.
Lower is safer. Many investors like to see it well under 85%, and the further under, the more room you have for a long vacancy, a bad tenant or a big repair. There is no official cutoff, and your own risk tolerance and lender matter more than any rule of thumb.
If yours is too high, the levers are the same ones that move DSCR: a lower price, a bigger down payment, a better rate, higher rent, or lower expenses.
The share of the year a rental must be occupied, at full rent, to cover operating expenses and the loan payment. Below that level you lose money each month.
Add yearly operating expenses and yearly loan payments (principal and interest), then divide by yearly rent at 100% occupancy.
Lower is safer. Many investors like to see it well under 85 percent, which leaves room for vacancy and surprises. Check your own risk tolerance and your lender's view.
They are related but different. DSCR compares income to loan payments. Break-even occupancy shows how much vacancy you can survive before cash flow turns negative.
No. It is measured against full rent, so it answers a different question than a vacancy allowance. It shows how much vacancy the deal can take.
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