As stated in an earlier article, the break-even ratio (or BER) is used by lenders to gauge the proportion between the incoming and outgoing cash flow of a real estate rental property. The purpose being a desire to know what percentage a property’s income can decline before cash flow derived from the investment property breaks even with the debt service (or mortgage payment).
Though there are real estate investment software and real estate investing software solutions that compute this ratio automatically, it’s a good idea to know how its done. So let’s take a look.
How To Calculate
Break-Even Ratio = (Debt Service + Operating Expenses) / Gross Operating Income
Example. Let’s assume that the property’s first-year operating expenses are $20,000, the annual debt service is $25,000, and the gross operating income is $50,000. The BER would be 90% ($20,000 + 25,000 = 45,000 / 50,000 = 90.00%).
Next time we’ll discuss what it all means to the real estate investor, so stay tuned. In the meantime you might want to preview some real estate investment analysis reports that include break-even ratio.
