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Breakeven Cashflow Calculator
With interest rates rising many investors are seeing their free cash flow from their property reducing so it is a common question to ask at what interest rate will my property’s cash flow break even (free cash flow of zero).
For a simple scenario of a fully leased property with no expenses other than interest then the mathematics is pretty simple and can be shown as follows:
- FCF = PP. PY - PP.LVR.i
Where:
- FCF = Free Cash Flow
- PP = Purchase Price
- PY = Purchase Yield
- LVR = Loan to Value Ratio
- i = variable interest rate
It is then a simple question to set the Free cashflow to zero, and solve for the interest rate which gives:
- LVR.i = Py
- i =PY/LVR
So a couple of worked examples:
- If you are looking at buying a 5% yielding property at 70% LVR, then the breakeven interest rate is : 5%/0.7 = 7.14%
- If you are looking at buying a 8% yielding property at 80%, then the breakeven interest rate is 8%/0.8 = 10%.
Expressing this information as a chart we then have the following where the above examples can also be read directly from the chart.
