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How empty can the building get before it stops covering its bills? Enter operating expenses and debt service to find the occupancy the deal requires.
Break-Even Occupancy = (Operating Expenses + Annual Debt Service) ÷ Gross Potential Rent. On the $425,000 duplex: $17,100 of operating expenses plus $27,144 of debt service is $44,244, against $45,600 of gross potential rent. $44,244 ÷ $45,600 = 97.0%.
That result is the occupancy at which cash flow is exactly zero. Above it the property funds itself, below it the owner writes a check. Stated the other way, this duplex tolerates 3.0% vacancy before going cash-flow negative, which is less cushion than the 5% vacancy the same underwriting treats as normal. The contradiction between those two numbers is the deal telling you something.
Break-even occupancy carries the same information as DSCR, expressed in units an owner actually experiences. A 0.97 DSCR and a 97.0% break-even describe one condition, but the second one answers how many empty months it takes to get there.
On a two-unit building, occupancy does not move continuously. One vacant unit is half the building for the length of the turn, so a single vacant month in either unit puts the year at 95.8% and below the 97.0% the deal needs.
This metric uses operating expenses, so it inherits their exclusion of capital spending. A building at 97.0% break-even is covering taxes, insurance, management, and the mortgage. It is not covering a furnace.
Leverage moves this number far more than operations do. At 50% down, annual debt service falls to $16,968 and break-even occupancy drops from 97.0% to 74.7%, on identical rents and identical expenses.
Break-Even Occupancy = (Operating Expenses + Annual Debt Service) ÷ Gross Potential Rent. On this duplex, ($17,100 + $27,144) ÷ $45,600 = 97.0%. Gross potential rent means fully occupied at market rent, before any vacancy deduction.
Lower is safer, and the number that matters is the gap between it and the vacancy the submarket actually runs. A property breaking even at 97.0% in a market that runs 8% vacancy is structurally short, regardless of how the pro forma reads.
Expenses plus debt service exceed gross potential rent, which means the property cannot cover itself even fully leased at market rent. The deal needs a lower price, less debt, higher rents, or lower operating costs before occupancy is the relevant question.
Not under the standard definition, because it is built from operating expenses. Adding a capital reserve raises the break-even point and gives a more honest picture of what the building has to earn to sustain itself.
They are two views of the same coverage question. As DSCR approaches 1.0, break-even occupancy approaches the point where all potential rent is consumed. This duplex sits at 0.97 and 97.0% at once.
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