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Ricardo Murph II
Pro Member
  • Specialist
  • Cleveland
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Does 8% vacancy and 10% PM calculations make sense?

Ricardo Murph II
Pro Member
  • Specialist
  • Cleveland
Posted Aug 13 2018, 07:07

I am getting ready to close on my first rental this week in the Cleveland area. I have run the numbers and it makes sense for my goals. I have been using the BP calculator using real numbers and rules of thumb. The couple rules of thumb that have bothered me are vacancy and property management (PM).

The vacancy rule of thumb is 1 month of vacancy per year. It takes time to turn a unit over and find a new tenant. This works out to 8%/ month or 8.33%/ month for those who like more significant digits.

What has bothered me is that with a 12 month lease it is the 13th month that the unit is vacant. I would need 11 month leases to get the 8% vacancy. I am sure to make the math simple and to be conservative teachers use this 8% number.

With vacancy every 13 months I must look at a longer time horizon. 3 or 5 years. In three years there will be 2 months of vacancy (5.6%) and in 5 years three will be 4 months of vacancy (6.7%). Is 8% a terrible number for vacancy? No, just on the high side which may not make sense for some markets. Turnover every lease also means to me the property is in a C-D  class area and/or there is poor management of the property. I don't see a reason to over estimate this. 

The other rule of thumb that bothers me is property management being 10%. There are some low cost online PM companies and flat fee structures out there. It does seem like the majority fall into the 8-10% range locally. I was talking to a co-worker that just got his second property and he told me that he pays 8%/month and 1 month rent for a new tenant placement

These means that every vacancy represents TWO MONTHS of lost rent! One month due to time and one month due to fees. Where is that in the BP calculators? Using the percentages from above I think I need to add 5.6% to 6.7% to property management in my calculations. This should be added to PM line because if I self-manage this fee goes away but vacancy does not. This makes it 16% monthly for property management. This to me represents the truer cost of theoretical property management.

In summary the previously numbers I used for PM and vacancy was 10% and 8% totaling 18%. Now I think I should use 16% PM and 6% vacancy totaling 22%. I may also have to re-think my profit per door target using these higher numbers.

Does this make sense or am I over thinking this? Are you using different numbers?  

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