Before you can talk about profit, you need to know your floor. Break-even rent is the minimum monthly rent required to cover every cost of owning a rental property — mortgage, taxes, insurance, maintenance reserves, vacancy allowance, and management. Anything above that line is where your actual return lives.
The Break-Even Rent Formula
What Counts as a Cost
- Mortgage payment (P&I): Your largest fixed cost on a financed property
- Property taxes & insurance: Often escrowed into the mortgage payment, but always fixed obligations
- Maintenance reserve: A common rule of thumb is 1% of property value annually, or roughly 5–10% of rent monthly
- CapEx reserve: Separate savings for big-ticket items — roof, HVAC, water heater — typically another 5–10% of rent
- Property management: 8–12% of collected rent if professionally managed
- Vacancy allowance: Built into the formula via the vacancy rate denominator
In this example, any rent above $2,151/month generates positive cash flow after accounting for a realistic vacancy allowance. Charging exactly $2,000 — matching costs without a vacancy buffer — would actually run at a loss once real-world vacancy occurs.
Key insight: Break-even rent is not your target rent — it's your floor. Always price rentals with a margin above break-even to account for unexpected repairs, rate changes on adjustable financing, and market softening.
Using Break-Even Rent Before You Buy
Calculating break-even rent during due diligence — before you make an offer — tells you immediately whether a property can plausibly cash flow at achievable market rents. If break-even rent exceeds what comparable units in the area actually rent for, the deal likely won't cash flow regardless of how attractive the purchase price looks.