My Vacancy Allowance Analysis for SFR
Essentially is as follows:
New Lease Fee (one month’s rent) + Expected Missed Rent + “Refresh” Cash
(Refresh Cash = the amount out of pocket to prepare the property for new tenants, after tenant deposit is spent)
It looks like this:
(A/B)+(A*C / B)+(D/B)
Where:
A = New lease fee (1 month's rent) ($1,000)
B = # of Months in lease (24)
C = Expected # of months vacant in-between tenants (1.5)
D = “Refresh” Cash ($500)
In this example:
($1,000/24) + ($1,000 * 1.5 / 24) + ($500/24)
Which is:
41.67 + 62.5 + 21 = $125 which is 13% of monthly rent in this scenario
The equation allows me to make a judgement call in many different scenarios. For some tenants maybe my refresh cash will be $300 and for some it may be $1000. In some markets maybe my expected months of vacancy would be 1 and in some cases 2. Etc. etc. etc.
Your thoughts? Too conservative? Too liberal? Pretty good?
When I use this methodology, on top of my capex/RM analysis, I can't see how 99.9% of turn-key opportunities could possibly make sense.