Thornton, CO · Member since 2015 · 22 posts · 3 votes
In the rental calculator here, you factor in vacancy as an additional cost in owning a rental. I have been just automatically putting in percentages just to do the calculations without a second thought but I just realized isn't putting a percentage in vacancy in the calculator double counting your expenses for holding the property?
I mean the calculator already factors in your HOA, insurance, utilities, and mortgage,etc. Why is there an additional cost by this term vacancy? Vacancy is already factored in when we calculate the fees I just mentioned. Unless there is something I'm missing here or you actually pay someone because your rental is vacant, I just don't understand why we also have to put in numbers for vacancy when they are already accounted for.
Sycamore, IL · Member since 2016 · 48 posts · 14 votes
10y
Because when rental property is vacant, it is an expense to the owner. When rental place is vacant, then owner essentially will have to pay mortgage, HOA, insurance, etc. UNLESS, you projected that and include the cost of when your property is vacant. Its loss mitigation if you will. Hope that helps.😊
Thornton, CO · Member since 2015 · 22 posts · 3 votes
10y
I'm disappointed by the answers you both have given. Please READ my question carefully! If you've been paying attention to my question I've asked despite ALREADY factoring holding costs if I HAD to pay the entire expenses of owning the property that would already be accounted for in the HOA, mortgage,insurance, fees,etc.
My question is why are we double counting for something if we've already factored in those costs already in the calculation?
Unless you had to literally pay some imaginary person money just because your rental was vacant I see no reason why we need to factor in it twice when it's already in the calculations in the form of all the fees I've mentioned in my example.
Do I really have to spell it out that clearly? It's like saying you have holding costs you have to account for which are hoa fees, mortgage, utilities, insurance, etc. Then you're telling me now we have something called vacancy which is those same things we mentioned. You've basically threw another term that explained what I just accounted for, great! Now can we answer the real question?
Thornton, CO · Member since 2015 · 22 posts · 3 votes
10y
Potential gross income is potential. It isn't money that you're actually losing in the physical sense. It's what you could've potentially earned that you missed out on. So I fail to see how that would still be factored in to me ACTUALLY losing money out of pocket in a deal.
Thornton, CO · Member since 2015 · 22 posts · 3 votes
10y
Anyone intelligent out there that actually has comprehension of a simple question? And not old farts that think they know what I'm asking? I've stated multiple times that I've already accounted for the holding costs in a property. Yes I understand it costs money to own a property, let's move past that already and not act like an elitist who isn't really here to help others learn and actually learn to read the question.
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
Use your branes a little bit. Is a 20 unit apt that can only get 50% occupancy the same as one that can get 90%? Think about the expenses that will be affected by occupancy. Some will be higher and some will be lower based on the vacancy. And some will stay the same $ amount but will obviously be a bigger percentage of rents collected on high vacancy properties.
Now where is your double counting AND no one said it was actually money out of your pocket.
you're going to go far in this business with your attitude young man.
Listen, I asked a simple question, you gave answers that were not even addressing the point. Don't know how else to put it, if you're going to contribute, actually contribute.
Thornton, CO · Member since 2015 · 22 posts · 3 votes
10y
Originally posted by @Account Closed:
Use your branes a little bit. Is a 20 unit apt that can only get 50% occupancy the same as one that can get 90%? Think about the expenses that will be affected by occupancy. Some will be higher and some will be lower based on the vacancy. And some will stay the same 4 amount but will obviously be a bigger percentage of rents collected on high vacancy properties.
Now where is your double counting AND no one said it was actually money out of your pocket.
Ok, putting it simply. You have a property you own, you pay expenses to upkeep and own it. I understand it takes money to own property. This is basically what you've stated in your entire post. So what exactly are you calculating if you've already addressed the expenses? Yes some properties will cash flow more or less depending on occupancy but that's besides the point. The point is, you would've already factored in those expenses already as being an owner. So vacancy to me seems to just be another terminology for all expenses you are paying out of pocket when you don't have someone else covering for them.
Can you understand why I would think it would be double counting? So please enlighten me if there is something I'm missing. I came here to find out this answer, but so far no one has been addressing it.
Investor · Douglasville, GA · Member since 2014 · 313 posts · 181 votes
10y
@Tim Yang Many have contributed. Your attitude will not elicit a favorable response. I responded in the manner i thought appropriate for someone acting childish.
Just because you don't understand the answers doesn't make them wrong.
Saying "I don't understand your answers" will get you a lot more help than "I'm disappointed by the answers you both have given."
Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
10y
So vacancy to me seems to just be another terminology for all expenses you are paying out of pocket when you don't have someone else covering for them.
You have and incorrect definition. Vacancy is the reduction of PGI as I stated earlier.
@Tim Yang Many have contributed. Your attitude will not elicit a favorable response. I responded in the manner i thought appropriate for someone acting childish.
Just because you don't understand the answers doesn't make them wrong.
Saying "I don't understand your answers" will get you a lot more help than "I'm disappointed by the answers you both have given."
It's not that I don't understand the answers given, I understand that the responders haven't really put thought into their answers or comprehending the question in the first place. And I would say you're the one being childish here. I'm simply expressing my opinion on the quality of answers given so I can expect better ones that actually read the question and not assume.
Thornton, CO · Member since 2015 · 22 posts · 3 votes
10y
Originally posted by @Account Closed:
So vacancy to me seems to just be another terminology for all expenses you are paying out of pocket when you don't have someone else covering for them.
You have and incorrect definition. Vacancy is the reduction of PGI as I stated earlier.
from Thornton, Colorado
Are you high? Damn, now I want some Doritos!
So then explain how a reduction of PGI should be counted as money being lost. I'm trying to learn how these calculations work. The point of the calculator is to find a good deal that is going to make me CASH FLOW. So a projected earning seems to be besides the point. If it was a calculation done on the side as projected income that I could potentially earn that would be a different story.
But when it actually affects my cash flow that I am actually making just because it's vacant effectively means I'm double counting expenses of owning the property and just calling it "projected earnings" Do you understand where someone might be confused by that?
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
@Tim Yang, you NEED to allow for say a month per year vacancy if you intend to be REALISTIC! Accordingly, your projected gross earnings per year, on average, CANNOT be the same as gross rent. But rather than decrease that gross return figure, sensible investors express that as an increased expense. [If you don't get any vacancy in a particular year: bonus!]
@Tim Yang, you NEED to allow for say a month per year vacancy if you intend to be REALISTIC! If you don't get any vacancy: bonus! So, your projected gross earnings per year, on average, CANNOT be the same as gross rent. But rather than decrease that figure, sensible investors express that decrease in expected cash flow as an increased expense. Comes out the same! See?...
There we go! A legitimate answer. *claps You win a million dollars for being the 1st to answer the real question!
This is a real answer BP community, not the sorry excuse of answers and hostility towards someone who just wants to learn and understand what is actually going on in the calculations instead of mindlessly copying.
I can now understand where Bob Bowling was going with his PGI explanation but clearly I didn't have the right understanding of it, so would've been helpful if he clarified such terms when it's apparent that I'm unfamiliar with the subject.
Investor · NOVA, VA · Member since 2014 · 99 posts · 101 votes
10y
The question is a good one.
Most investors calculate phantom expenses as a monthly cost that is paid to their reserves against future cash flow reductions. Capex and vacancies are such expenses. The reserves accrue until needed and are then used to mitigate the reduction in cash flow when (to use your example) a vacancy occurs. The calculator on here follows this model.
Others fund their reserves upfront at closing or out of personal savings outside of closing.
Others rely on credit availability for reserves.
Some just ignore reserves altogether...please don't do that. Find a way to account for reserves that allows you to sleep at night.
Actual expenses are deducted from actual income. Obviously.
A vacancy is considered separate from all other expenses because it is not capitol in nature. You think of it as a expense because each month the unit is empty you must add the missing income to the business out of your own pocket. It is a non capitol expense requiring money to come from somewhere. Rather than thinking of it as a loss however think of it as you becoming your own tenant during the vacancy. and you must pay the rent yourself which adds that cost to your personal expenses which in turn is transferred to your business expenses.
Sycamore, IL · Member since 2016 · 48 posts · 14 votes
10y
Glad you found the answer you were looking for. We have different ways and levels of expressing or comprehending things. Thats not really an issue, its how one connects known to unknown. IMO we were all saying the same thing here: vacancy means no income, which would mean expenses to your business.
Rental Property Investor · Long Beach, CA · Member since 2015 · 61 posts · 38 votes
10y
I think you are just thinking of it differently than everyone else. The point of putting money aside every month for vacancy is so that when your tenant moves out, you will already have money to cover for that month that you are not receiving rent. When we are doing the math for an investment property, usually we add up the 12 months of rent minus all of the expenses for that year like you were saying (HOA mortgage etc). The vacancy is just to account for the month of vacancy you will have if you don't get the full 12 months of rent. It would be the same if you assumed you were only getting 10 or 11 months of rent a year and subtract expenses for the whole year. It is just meant to give you a more realistic number of your profit since you will never have a property filled 12 months of every year. You don't physically give the money to anyone. Let me know if I am not being clear maybe I will try explaining it differently.