Break-even rent, and why it is not the mortgage payment
People estimate their break-even rent as the mortgage payment plus taxes and insurance, which understates it by a wide margin. The reason is that a chunk of the costs scale with rent rather than sitting fixed, and vacancy takes a slice off the top before any of it happens.
The arithmetic is straightforward once written out. Collected rent is the lease rent times one minus vacancy. Percentage costs — management, maintenance, the capital reserve — take a share of what is collected. What survives is rent times a single factor, and break-even is where that equals the fixed costs plus the loan payment.
Concretely: at six percent vacancy and twenty percent of collected rent going to management and reserves, one dollar of lease rent leaves about 75 cents. So covering $1,610 of fixed costs and loan payment takes about $2,141 of rent, not $1,610. The gap between those two figures is what gets missed.
Three axes, and they move together
The page shows rent decline and vacancy separately because they are separate variables, but they are correlated in the direction that hurts. A softening rental market produces both at once: units take longer to fill and fill at lower rents. That is why the combined row exists, and why testing each axis alone gives a picture that is more comfortable than the situation warrants.
| What moves | How it usually arrives | How fast you can react |
|---|---|---|
| Rent | At the next lease, not mid-term | Slowly — you are locked in until renewal |
| Vacancy | All at once, when a tenant leaves | Weeks at best, and the make-ready is unpaid time |
| Fixed costs | Annually, mostly upward | Barely — taxes and insurance are not negotiable in the moment |
| Loan payment | At a reset, or when you refinance | Not at all, once it has happened |
Note the asymmetry in the last column. The variable with the largest single-step effect on cash flow, the loan payment, is also the one you have the least ability to respond to. That is the argument for testing a rate reset explicitly rather than assuming the payment stays where it is.
What headroom is worth having
This page will not tell you what number is safe, because that depends on what else you have and what a bad year would do to the rest of your life. What it can do is make the size of the buffer explicit so the question is answerable.
Useful reference points: one full tenant turnover typically costs somewhere between one and two months of rent once vacancy, make-ready and leasing are counted, which is roughly eight to sixteen percent of a year. A single significant repair can be several months of cash flow. If the headroom on this page is smaller than one turnover, the property is not tolerant of a normal event, let alone an abnormal one.
The other buffer worth naming is the one outside the property. If a bad year requires you to fund the shortfall, the money has to come from somewhere, and an emergency fund sized for your own household does not automatically cover a rental as well.
The variable this page cannot model
Every scenario above assumes that when a tenancy ends, it ends and the unit becomes available. In practice how quickly a non-paying tenant can be replaced, what notice must be given, what the process costs and how long it takes are matters of state and often city law. They differ enormously between jurisdictions, they change, and in the months when this calculator is telling you the deal is under pressure, they are precisely what determines how long the pressure lasts.
Nothing here should be read as a statement of what those rules are anywhere. Find out what applies where the property sits, from someone who practises there, before you own it rather than during the first problem. Then come back and set the vacancy figure to something informed by that answer. For the arithmetic on the other side of a good outcome, the total return page shows what the property produces when nothing goes wrong, and the two figures are worth holding in mind together.
Questions people ask
What expense ratio should I use?
The ratio is an output of your own numbers rather than something to look up. Add management, routine maintenance and the capital reserve, express the total as a share of collected rent, and use that. If you want it built from the actual components — the roof, the furnace, the water heater with their real costs and remaining lives — the reserve calculator does that and produces a figure specific to your property rather than an average of somebody else's portfolio. Ratios quoted as rules of thumb are compressed versions of a distribution, and your property sits at one point in it, not at the mean.
Why does the break-even vacancy come out so high?
Because break-even vacancy answers a narrow question: at the current rent, how much of the year can the unit be empty before the annual cash flow reaches zero. On a property with decent headroom that can be a surprisingly large fraction, which sounds reassuring and mostly is not. Real vacancy does not arrive as a smooth percentage spread across the year — it arrives as one long empty stretch during which the mortgage is still due every month. A property that can absorb sixteen percent vacancy annually still needs three months of payments funded from somewhere when those three months happen consecutively.
Should I test a rate reset even on a fixed loan?
It is worth doing if you might refinance, since a refinance replaces your rate with whatever exists that week regardless of what you started with. It is also worth doing if the loan has any reset feature, and terms on investment property lending vary by lender and by program in ways this page does not attempt to describe. Read your own note, and ask the lender directly what happens at each date in it. The point of the exercise is to find out whether the deal survives a rate you did not choose, which is a question best answered before rather than after.
The combined shock row looks bad. Is that scenario realistic?
It is a scenario, not a forecast, and its purpose is to show the shape of the downside rather than to predict it. Rent falling ten percent while vacancy rises six points is the kind of thing that happens in a soft local market, and the two moving together is more typical than either moving alone. Whether it is likely where your property sits is a local question this page cannot answer. What it can tell you is what the month looks like if it happens, which is the part worth knowing in advance.
Can I just raise the rent if costs go up?
Sometimes, within limits that are not entirely yours to set. What a tenant will pay is a market question, and what you are permitted to charge and how much notice a change requires are legal questions answered by state and sometimes city rules that vary widely and change. Mid-lease you generally cannot change it at all. The practical consequence for this page is that the rent line is the slowest of the variables to respond, so the buffer has to be big enough to carry the property through the lag rather than assuming an immediate adjustment.