Lease Investment Breakeven Calculator

This calculator shows how far a rental property bought with a loan can be pushed before it stops paying for itself. A rental yield calculator answers "what is left under today's conditions"; this one answers "when does what is left reach zero as conditions worsen". Enter the purchase price, floor area, monthly rent per pyeong, vacancy rate, operating expense ratio, loan-to-value and interest rate, and you get today's net operating income and pre-tax cash flow, with two lines drawn above them: the vacancy rate at which cash flow hits zero, and the interest rate at which it hits zero.

It also shows the distance from where you stand to each line. Vacancy headroom is the gap between today's vacancy and the breakeven vacancy; rate headroom is the gap between today's interest rate and the breakeven rate. The narrower the gap, the smaller the shock that tips the property into loss.

Anyone buying a shop, warehouse or office with a large loan, before signing. The yield at purchase may look fine, but what happens when one tenant leaves or rates rise once has to be checked separately. Logistics warehouses and single-tenant retail with only one or two occupiers can jump from zero vacancy to half-empty in a single step, so the real question is whether the breakeven vacancy absorbs that step.

Existing owners use it ahead of a rate reset. When the loan matures and a new rate is set, you can see whether the offer stays below your breakeven rate or whether you need to repay part of the loan to bring the loan-to-value down. Enter the bank's proposed rate and the answer is immediate.

There is no tax law here; this is the standard cash-flow arithmetic used in commercial real estate. Floor area times monthly rent per pyeong times twelve gives gross annual income. Subtracting vacancy gives effective gross income, and subtracting operating expenses as a share of that gives net operating income (NOI). The loan is the purchase price times the loan-to-value ratio; the loan times the interest rate is annual interest; NOI minus annual interest is pre-tax cash flow. NOI divided by the purchase price is the cap rate.

Breakeven vacancy solves the equation "NOI equals annual interest" for the vacancy rate. Take gross income times (1 minus the operating expense ratio) as the base, and the share of that base eaten by interest is the vacancy you can afford. If interest exceeds that base the property loses money even at zero vacancy, and the calculator reports that there is no breakeven. Breakeven interest rate is NOI divided by the loan amount, and is undefined with no loan.

The leverage flip rate shown alongside is the same number as the cap rate. Once the interest rate exceeds the cap rate, borrowed money starts reducing your return on equity even though cash flow is still positive. It is always below the breakeven rate, so when the interest rate sits between the cap rate and the breakeven rate you are in the zone where the property is not losing money but the loan is.

Consider a dry warehouse bought for ₩17 billion with 3,000 pyeong of floor area, rent of ₩36,100 per pyeong per month, 15% vacancy, a 20% operating expense ratio, 60% loan-to-value and a 4.74% interest rate. Gross annual income is ₩1,300 million; after vacancy and operating expenses, NOI is ₩884 million, a cap rate of 5.2%. The ₩10.2 billion loan costs ₩483 million a year in interest, leaving pre-tax cash flow of ₩400 million.

Breakeven vacancy is 53.5%, giving 38.5 percentage points of headroom above today's 15%. The breakeven interest rate is 8.66%, 3.92 points above the current rate. But the leverage flip rate equals the cap rate at 5.2%, so once rates climb past that the loan starts eroding returns even before cash flow turns negative. This property has ample room on vacancy and rather less on rates.

The first is reading a big margin as safety. 38.5 points of vacancy headroom means the property survives losing half its tenants, but with a single tenant vacancy goes from zero to total in one move; headroom must be read together with the number of tenants. The second is forgetting principal. This calculation subtracts interest only. On an amortising loan, real cash flow is lower by the principal repayment and every breakeven arrives sooner.

The third is leaving taxes and capital expenditure out of operating expenses. Property tax, comprehensive real estate tax and building repairs belong in the expense ratio or NOI is overstated. The fourth is entering headline rent. Rent-free periods and concessions should be netted down to effective rent. The last is confusing the breakeven rate with the leverage flip rate: the first is where losses begin, the second is where borrowing stops helping. In the band between them, reducing the loan may be the right move.