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Edmonton Home Owners: Break-Even Ratio

Homes For Sale Edmonton

Wikipedia defines Break-Even Ratio (BER) as, “The cash break even ratio is used in evaluating the financial performance of an income property to determine what rate of occupancy is required to meet both operating expense and mortgage payments (debt service).”

Note: Remember, you can access all our available Rental Homes For Sale in Edmonton through our Edmonton MLS Listings page.

Homes For Sale Edmonton

For Edmonton Home Owners, knowing BER would be significant if they’re thinking of owning an Edmonton rental properties (which highly advisable in this troubles economic times). The BER is the tool that lenders use to analyze the viability of the rental property to be eligible for a loan or not.

With this, they can determine the risk for default of the rental property… they wouldn’t want to have a Greece-like headache over their heads.

Here’s how to determine an Edmonton Rental Property’s Cash Flow:

Rental Income – Overhead expenses & debt = Cash Flow

….And as for the BER, here’s the magic formula:

(Debt + Overhead expenses) / Gross Operating Income = BER

As an example, a Walker Edmonton home has an expected $60,000.00 Gross Operating Income for year 2015. Annual Operating Expenses would be $30,000.00 and annual debt payment of $25,000.00.

($25,000.00 + $30,000.00) / $60,000.00 = 0.91 or 91%

The ideal BER is 85% or less because lenders would want more room in case of a decline. An 85% BER would provide them a swinging room of 15% decline in the rental income before the Edmonton rental property breaks even.

In our example above, 91% is too risky since a decline in the rental income of only 9% would put the property in the breakeven point. The spread is too thin! In this economic environment that we are in, a 9% decline can hit anytime. Our example Walker property would not pass.

Now that you know what the BER is and how it is used, you can utilize this new found knowledge to your advantage and start plotting you way to financial success. Good luck!

 

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