Which formula represents the break-even ratio?

The break-even ratio is a crucial metric in real estate that helps investors and appraisers determine the financial viability of a property. It is calculated by taking the total of operating expenses and debt service and dividing it by the effective gross income. This formula provides insight into the proportion of income that is required to cover the costs associated with the property.

This ratio assists in assessing the risk associated with a real estate investment. A break-even ratio that is too high may indicate that the property is at risk of operating at a loss, as it suggests that a large portion of the income is used to cover operating expenses and debt. Conversely, a lower break-even ratio indicates a healthier income situation where fewer earnings are needed to cover essential costs.

Other formulas listed do not capture the totality of expenses related to a property. For instance, while net operating income divided by effective gross income measures the retention of income, it does not consider debt service, which is a critical component of overall expenses. Similarly, focusing solely on operating expenses alone does not encapsulate the entire financial picture since it omits debt service. The potential gross income approach is not appropriate for break-even calculations because it does not take into account the real income generated after vacancies and collection losses. Thus, the