The Cash break even ratio is used by both investors and lenders to measure total cash charges against PGI (Potential Gross Income). This ratio normally varies between 60% and 80%. The lower the ratio, the greater the cash return to the investor.

Calculation formula:
Debt service + Operating expenses divided by the Gross operating income = Cash beak even ratio.

Example: You expect first-year operating expenses of $25,000 and the annual debt service of $28,000. If your gross operating income is $60,500, what is your property’s cash break even ratio?
28,000 + 25,000 / 60,500
Cash break even ratio = 87.6%

Most lenders look for a ratio of 85% or less. If occupancy rates in a particular area are low, lenders may require a break even ratio that is several percentage points less than the average occupancy rate.