The break-even ratio is operating expenses plus debt service divided by effective gross income. Tells you how much occupancy the property needs to cover all costs. LA multifamily targets under 80%.
A break-even ratio of 80% means the property can sustain a 20% occupancy drop before running at a loss. Lower break-even ratios indicate more operating cushion; higher ratios indicate less margin for vacancy or unexpected expenses.
Modern LA multifamily underwriting targets break-even ratios of 72–80%. Higher than that suggests either aggressive leverage or underperforming operations. Pre-1978 RSO inventory with capped rent growth often operates at higher break-even ratios than post-1995.
From the Sterman LA Multifamily Glossary — defined the way a broker with $1.41 billion across 254 closed transactions actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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