Here are some quick and easy formulas to use to figure out your break-even point:
1. Calculate your potential gross income.
Potential gross income is defined as the most income the property can make when its 100% occupied. For example:
10 apartments renting at $350.00 per week each your potential gross income is:
10 units X $350.00 p/week = $14,000 p/month
$14,000 X 12 months = $168,000 p/year.
2. Calculate you total operating expenses.
Add up all of your monthly expenses, including taxes, insurance, maintenance, repairs, utilities, landscaping, accounting, management fees (if applicable), salaries and so on. Then multiply that number by 12 to get your annual total.
3. Calculate your total mortgage payments for 12 months.
This is called your Annual Debt Service. You can use this formula to find your break-even point.
Break-even occupancy %point = (Operating Expenses + Annual Debt Service) ÷ Potential Gross Income X 100.
Here is a quick example for you.
The building is at 50% occupancy. At 100% occupancy the building brings in $168,000 and the operating expenses run at $60,000. The annual debt service is $46,000:
Break-even occupancy % point:
($60,000 + $46,000) ÷ $168,000 X 100 = 63%
This means that when the property reaches approximately 63% occupancy, it will break even. Below 63% occupancy the property will operate in negative cash flow and any occupancy above 63%, the property will have a positive cash flow situation. Given these numbers you need to ask yourself these questions:
1. How long will it take to reach 63% occupancy?
2. Can I support the property financially until it reaches 63% occupancy?
Some questions that come to mind in regard to Real Estate are:
1. How much growth will there be?
2. How much time will it take?
The more fundamental issue here is:
What causes a property to appreciate in value?
In general, revenue, particularly NETT REVENUE (after operating expenses), drives the value of income property. The basic principal here is that real estate investors really buy the property’s income stream. If you have more income stream to sell, you can expect to get more for it. The faster and greater your revenue increases, the more likely the value of the property will increase.
Real Estate prices will move on supply and demand and not necessarily at the pace of inflation. Prices have been known to double in a few years and then do nothing for a number of years. The better located the property, the demand it will have. However, you will probably pay more for it though, as the more expensive the property normally the less the yield.
If you are worried about loss of employment then you should examine income replacement insurance and disability insurance. This will allow you to sleep well at night.