Investor · Saint Louis, MO · Member since 2012 · 46 posts · 19 votes
When I am evaulating a potental investment, I put it through a series of "stress tests" (to borrow a banking term) to see if it will perform.
What worst-case sceanrios do you look at?
I look at:
-Long Term Vacancy: how much vacancy can I have and still cash flow?
-Crushing Maintenance Costs (every major system fails)
-Declining Rent: how will the cash flow look if asking rent is overestimated?
Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes
12y
One "test" I used on a recent apartment building we bought was the break even vacancy. I wanted to know at what vacancy level the property would be breaking even and then if I was comfortable that we could keep it above that.
Based on the numbers we had I figured the break even vacancy was around 60% (can't remember the exact number). I felt pretty confident that we could keep the property over 60% occupied. That was another indicator that we had a good deal on our hands.
Real Estate Investor · Lincoln, NE · Member since 2013 · 584 posts · 353 votes
12y
One "test" I used on a recent apartment building we bought was the break even vacancy. I wanted to know at what vacancy level the property would be breaking even and then if I was comfortable that we could keep it above that.
Based on the numbers we had I figured the break even vacancy was around 60% (can't remember the exact number). I felt pretty confident that we could keep the property over 60% occupied. That was another indicator that we had a good deal on our hands.
Real Estate Consultant · Camarillo, CA · Member since 2010 · 2k+ posts · 1k+ votes
12y
@Account Closed you certainly want to be aware of the risks and mitigate them. Any RE deal can be squashed by worst case scenario. DD, cash reserve, and insurance are you best protection.
Investor · Saint Louis, MO · Member since 2012 · 46 posts · 19 votes
12y
Wade Sikkink that's a good one. On my first investment property (a duplex) it gave me huge peace of mind to know that I could cash flow at 50% vacancy.
Investor · Los Angeles, CA · Member since 2015 · 50 posts · 20 votes
11y
This is a great topic more than year after the initial post because most real estate markets are in the Seller's Phase and difficult to find rental properties with good numbers. I'm seeing "investors" buy properties that break even or slightly negative. They rationalize with depreciation and pay down of the mortgage they are "profitable". I like the idea above in calculating how much vacancy (or decrease in rental revenue due to dropping rents) can occur yet still be at break even (or whatever acceptable negative cash flow you can financially handle).