Table of Contents
- What is Breakeven Occupancy in Multifamily Real Estate?
- Breakeven Occupancy Formula: How to Calculate Breakeven
- Breakeven Occupancy Calculator
- Breakeven Occupancy Example in Multifamily
- How the Breakeven Occupancy is Used in Multifamily Real Estate
- What's a Good Breakeven Occupancy?
- Frequently Asked Questions About The Breakeven Occupancy Formula
- Breakeven Occupancy in Multifamily - Conclusion
- Sources
Understanding occupancy and cash flows are crucial to know how much exposure you can take on as a multifamily operator before you’re at a deficit. In today’s market, U.S. apartment unit occupancy is at all-time highs due to supply constraints, but each property in each market has its own pulse.
As an operator, you have to be able to foresee and calculate what the breakeven occupancy ratio is for your property on behalf of your real estate investors.
Key Takeaways
- In commercial multifamily real estate investing, the breakeven occupancy is the occupancy number at which the real estate investment no longer cash flows and instead is losing money and in an operating deficit.
- The breakeven occupancy in multifamily real estate is used to stress test a prospective property acquisition. An operator will run the breakeven occupancy formula to determine how much vacancy the property can sustain before it burns cash.
- A good breakeven occupancy is anywhere from 62% to 85%.
What is Breakeven Occupancy in Multifamily Real Estate?
In commercial multifamily real estate investing, the breakeven occupancy is the occupancy number at which the real estate investment no longer cash flows and instead is losing money and in an operating deficit.
Breakeven Occupancy Formula: How to Calculate Breakeven
The breakeven occupancy is a straightforward formula to calculate; all you need is three figures to perform the calculation. The following is the formula:
Breakeven Occupancy = (Total Operating Expenses + Total Debt Service) / Potential Rental Income
The debt service portion of the formula ties directly to the debt service coverage ratio your lender will run separately.
Breakeven Occupancy Calculator
To use the breakeven occupancy calculator below, simply input the annual operating expenses, debt service and potential rental income for the subject apartment community.
When you complete, click the “Calculate” button below.
Breakeven Occupancy Calculator
Disclaimer: This calculator is for illustrative purposes only. Please seek professional advice if needed.
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Breakeven Occupancy Example in Multifamily
Let’s say we had a 200-unit apartment community with an annual gross scheduled income of $3,000,000 and $1,300,000 in annual operating expenses.
Let’s also say that you had $700,000 in annual debt service.
Now that we have these three numbers, we can run the formula as follows:
($1,300,000 + $700,000) / $3,000,000 = 0.66 Breakeven Occupancy
In the chart below, I break down an example of a five-year lookback on a property. Starting with the same numbers used in the 200-unit apartment complex example above and breaking down the variability of the breakeven occupancy year over year.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
|---|---|---|---|---|---|
| Gross Scheduled Income | $3,000,000 | $3,025,000 | $3,140,530 | $3,300,000 | $3,346,000 |
| Operating Expenses | $1,300,000 | $1,339,000 | $1,343,000 | $1,392,000 | $1,434,000 |
| NOI | $1,700,000 | $1,686,000 | $1,797,530 | $1,908,000 | $1,912,000 |
| Debt Service | $700,000 | $700,000 | $700,000 | $700,000 | $700,000 |
| Free Cash Flow | $1,000,000 | $986,000 | $1,097,530 | $1,208,000 | $1,212,000 |
| Breakeven Occupancy | 66.6% | 67.4% | 65% | 63.3% | 63.7% |
Next, we’ll look at how the breakeven occupancy is used in multifamily real estate.
How the Breakeven Occupancy is Used in Multifamily Real Estate
The breakeven occupancy in multifamily real estate is used to stress test a prospective property acquisition. An operator will run the breakeven occupancy formula to determine how much vacancy the property can sustain before it burns cash.
This is vital for any multifamily acquisition, especially when you are acquiring a property with a value-add component. Meaning physical or operational improvements will be made to the property, which tends to cause a natural dip in occupancy throughout the stabilization period.
Now that we understand what it’s used for, let’s look at what would be considered a good breakeven occupancy or a comfortable range for multifamily properties.
What's a Good Breakeven Occupancy?
A good breakeven occupancy is anywhere from 62% to 85%. For simple math, this means that on a 100-unit apartment community, you could, on average have anywhere from 15-38 units vacant before you hit negative cash flow.
Finding a deal in this day and age with a breakeven occupancy on the lower end of that range is very difficult to find. This is of course, due to apartment values being very strong, making it much more challenging to create this kind of scenario. That being said, the more you’re able to add value to the tenant base, increase rents, lower delinquencies, and optimize expenses, the closer you’ll get to a lower breakeven occupancy. Just remember the band assumes a clean read on how occupancy is calculated in real estate since physical, economic, and leased each yield a different percentage.
Frequently Asked Questions About The Breakeven Occupancy Formula
How do you calculate occupancy growth?›
To calculate the occupancy growth, you would take the present occupancy and subtract it from the previous month’s occupancy; then, you would divide that number by the previous month’s occupancy to get the occupancy growth rate.
What is breakeven rent?›
Breakeven rent is similar to breakeven occupancy, except in breakeven rent, you’re looking to find what gross rental amount you need to calculate to break even.
Breakeven Occupancy in Multifamily - Conclusion
Breakeven occupancy is one of the first stress tests we run on any property we underwrite, and the one we revisit anytime debt service or operating expenses move materially. The calculation itself is simple, but the discipline matters: knowing exactly how much vacancy your asset can absorb before it bleeds cash is what separates operators who weather a soft market from those who get caught flat-footed.
For a stabilized Class B or C multifamily property, a breakeven occupancy in the 62%-85% range gives you meaningful margin against the kind of short-term vacancy spikes that happen during a value-add renovation, slow lease-up, or a softer leasing season. If your underwriting puts breakeven much above that band, the deal is either too leveraged or too thin on rent-growth assumptions — and worth a second look before you sign the LOI.
Sources
- NMHC — Quarterly Survey of Apartment Market Conditions
- Fannie Mae — Small Loans — Multifamily Financing Options
- IRS — Publication 527, Residential Rental Property
- FRED — Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity
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Daniel Di Cerbo
Daniel is the Co-Founder and Principal of Willowdale Equity, a private real estate investment firm specializing in Class B & C value-add multifamily assets across the Southeastern U.S. He has been a sponsor on over $150M of multifamily acquisitions across Georgia and Texas.
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