California Real Estate SalespersonProperty Valuation and Financial AnalysisHard
A lender is analyzing a commercial property to determine risk. The property has annual operating expenses of $30,000 and annual debt service (mortgage payments) of $40,000. The Gross Potential Income (GPI) is $100,000 per year. What is the property's break-even ratio?
- A30%
- B40%
- C60%
- D70%
Show answer & explanationAnswer & explanation
Correct answer: D. 70%
Break-even ratio = (Operating Expenses + Debt Service) ÷ Gross Potential Income = ($30,000 + $40,000) ÷ $100,000 = $70,000 ÷ $100,000 = 70%.
Why the other options are wrong
- A. Reflects only operating expenses, ignoring debt service.
- B. Reflects only debt service, ignoring operating expenses.
- C. Incorrect combined ratio.
Break-Even Ratio
A ratio used by lenders to measure risk, calculated as (Operating Expenses + Debt Service) ÷ Gross Potential Income; indicates the occupancy level needed to cover all costs.
- Lower ratio = lower risk for lender
- Formula: (OpEx + Debt Service) ÷ GPI
- Shows minimum occupancy needed to break even
Memory trick: Expenses plus debt, over income, tells the break-even point