Minimizing Vacancy (risk) and Protecting Portfolio?

Question

Edit: Unsure if this is best suited in Starting Out, or Investor Psychology...

My wife and I are pretty new to this whole thing, and we have a lot to learn. We currently have 1 unit and it's working well for now.

As we expand, I'm aware that vacancy is not my friend. The Buy/Hold calculator factors that in, but I realize that's "average".  It doesn't account for national-level issues, such as the bubble and resulting crash back on 06/07 where unemployment spiked. On one hand, a ton of foreclosures (should) address the vacancy issue since people need a place to live. On the other, the foreclosure tanks credit and could cause an applicant to not pass a pre-screen process.

As an investor, how do you protect against that sort of scenario? I know some investors got out before hand, and that's one way, but what if you stay in? The first thing that comes to my mind is to reduce expenses and bring the P+I down as much as possible to reduce overhead and provide a cashflow buffer. What happens to your business if 20, 30, 40% of your portfolio is suddenly vacant? Especially if you have a smaller portfolio and any unaccounted vacancy really hurts?

Zach Quick · Answer

@Andrew Glenn You are smart to ask these questions before jumping in.  This is why lenders often stress or require 6 months of PITI liquid in reserves per property so that you are more cushioned should you have a longer or higher vacancy.

I would also "stress test" your #'s when you are buying a property, as in can I still make $ if the vacancy rate in my area jumps 5% or you have to lower your projected rental income by $50-$100 month.  This will help you determine you are buying right.

You also may be over-thinking it some. If you are buying in a decently populated area and have over 10 units and all the sudden have 40% vacant (and it's not due to your units being trash or completely overpriced) then you won't be the only one majorly hurting in that area.

Zach Quick · Answer

@Andrew Glenn I have heard someone on here say before that the life perks don't really happen until you get at least 7 units. Probably some truth to that, a bump in the road in one of your units isn't that big of a deal once you have a few.

Andrew Glenn · Answer

@Zach Quick Thanks. That helps a bit. After 10 units, then the numbers work for me and vacancy percentages aren't as much of a concern. Between 1 and 10, especially the first 4 or 5, are where I'm trying to mitigate. Your suggestion to stress test makes perfect sense. The reserves that the bank requires are there for a reason, thanks for pointing that out.