Playbooks / Property
Break-even occupancy
The rule
Yield tells you what a property earns when everything goes right. Break-even occupancy tells you how much has to go wrong before it costs you money. The second is the more useful number and almost nobody calculates it.
What it is
Take the annual fixed costs that do not stop when the tenant leaves: service charge, insurance, the mortgage, standing utility and administrative charges. Divide by the rent the property earns when fully let, after the costs that do scale with occupancy. The answer is the fraction of the year you must be occupied to break even.
A property with a break-even occupancy of forty percent is robust. One at eighty five percent is a coin flip with a mortgage attached.
Why it is the number that matters
Vacancy is the risk that actually happens. Prices fall occasionally, tenants leave routinely. A unit that needs to be let eleven months in twelve to stand still has no room for a slow re-letting, a rent renegotiation, or a tenant who stops paying while an eviction runs its course.
It also exposes the real cost of leverage more honestly than a yield does. Adding a mortgage raises fixed costs, which raises break-even occupancy, which shortens the vacancy you can survive. Two owners with the same property and the same rent can have completely different exposures to the same empty month.
Reading the answer
Under fifty percent. The property carries itself through a bad year. Typically an unleveraged unit with a modest service charge.
Fifty to seventy percent. Normal for a sensibly leveraged rental. A month or two of vacancy is absorbed by the margin.
Seventy to eighty five percent. Thin. A single difficult re-letting or a service charge increase moves you to funding it from elsewhere.
Above eighty five percent. The property is not an income asset. It is a leveraged bet on price with a rental subsidy attached, and it should be described that way when deciding whether to keep it.
The version for a portfolio
Run it across everything you own together rather than unit by unit. Fixed costs from every property against total rent. That number tells you what a market-wide soft patch does to you, which is the case where several units go quiet at once rather than one.
The arithmetic
Where it breaks
- It assumes the rent stays where it is. A re-letting at a lower rent raises break-even occupancy even if the unit is never empty, which is the quieter version of the same risk.
- It treats a repayment mortgage instalment as pure cost, when part of it is capital repaid to yourself. Using interest only makes the ratio more flattering and arguably more honest, but pick one and be consistent.
- Service charges rise. A ratio calculated on this year's charge is a snapshot, and a special levy for a chiller replacement can move it several points in one letter.
- It says nothing about capital value. A property with excellent break-even occupancy in a falling market is still losing money, just not in cash.
- Portfolio level netting can hide a single bad asset. Run it both ways.
- It does not model the eviction timeline. A non-paying tenant is worse than an empty unit, because you have the costs and no ability to re-let until the process completes.
When to use it
Before borrowing, and once a year on everything you already own. It is also the right number to quote when someone asks whether a property is risky, because it answers with a month count rather than an adjective.
The Net Rental Yield does this arithmetic for you, in your currency, in about thirty seconds.
Open the calculatorSources
Last reviewed . Commercial relationship disclosure: the author works in Dubai real estate brokerage. See the disclosure standards. Disclosure standards.