Maximize Your Rental Property Investment By Knowing Your Breakeven Point
Understanding your breakeven point as a landlord is key to making smart decisions about your rental property investment, and for securing a mortgage. Knowing this number helps you assess whether a property is a good investment and gives mortgage lenders confidence in your ability to cover expenses as well.
In this article I’ve outlined a simple formula you can follow to help you work this out. Looking for the best mortgage rates is also essential for a rental property investment, which is why it’s important to work with an experienced mortgage broker. A broker understands not only your financial position but what your financial goals are as well so you can develop strategies along the way to help you grow your wealth.
How to Calculate The Breakeven Ratio For Your Rental Property Investment
When it comes to a rental investment, the formula to calculate your breakeven ratio is simple, and you only need three pieces of information:
To calculate your breakeven point, add your debt service and operating expenses together, then divide that sum by your gross operating income.
Let’s say:
Your breakeven ratio would be ($18,000 + $5,000) ÷ $27,000 = 0.85, or 85%.
This means your rental property needs to be occupied at least 85% of the year to cover all your costs.
Why the Breakeven Ratio Matters For Your Rental Property Investment
This ratio is important for both you and your mortgage lender because it shows how financially stable the property is. A lower ratio means the property is less risky. For example, a ratio of 90% means even a small vacancy could put you in the red, while 70% gives you more breathing room—your property could sit vacant for a couple of months, and you’d still cover your costs.
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Most lenders and investors prefer a breakeven ratio of 85% or lower. Even with Barrie’s low vacancy rate, your lender might hesitate if you can’t reduce the ratio.
How to Lower The Breakeven Ratio For Your Rental Property
If your breakeven ratio is high (close to 85%), you’ll want to lower it to make your property more attractive to lenders or to increase your profit. You can do this by either increasing your income or reducing your expenses.
Tips For Increasing Your Revenue
You can’t always raise rent, but there are ways to earn extra income, like charging a small fee for pets, parking, or offering additional services, such as premium TV channels or including wifi for free. You can also minimize vacancy periods by keeping a waiting list of potential pre-screened tenants, so you always have someone ready to move in when a tenant leaves.
Tips To Cut Operating Costs
Look for ways to save on maintenance by shopping around for affordable service providers, like plumbers or cleaners. Also, fixing minor issues right away can prevent larger, more expensive problems down the road.
You Can Also Work To Lower Fixed Costs
Refinancing your mortgage to get a lower interest rate is another way to improve your breakeven ratio, though you might need to build up more equity to qualify for better rates. Working with a mortgage broker like myself can help you find lenders who specialize in working with rental property investors who might have special rates or mortgage options specific to your needs.
Are You A Rental Property Investor Looking For Ways To Meet Your Breakeven Point? Give Me a Call. It’s Time We Talk.
As a financial advisor and experienced mortgage broker, I can sit down with you and review your investment property and can help you develop a financial strategy. Once we have a plan then I’ll also find you the best mortgage solution specific to your breakeven point. Contact me today at 705-315-0516 or book a consultation with me online and together we’ll get you the mortgage you need so that your rental property investment thrives!