High Vacancy Rates-Should I Buy??

Question

Derek W. · Answer

I have some units in high density unit-ville.  There are lots of 4-rent signs all around me all of the time.  But I stay filled.  I am $10-20 cheaper per month than the average competition and I offer free basic cable for the first year. In my lower socio-economic area this is a tie breaker that I seem to win. I wouldn't walk from the deal. Just work harder and smarter than the other local landlords!

Nancy H. · Answer

Meant to say, I don't recommend attempting to extrapolate from my numbers. Your mileage may vary.

Good luck!

Nancy H. · Answer

@ Brady Hanna, I just checked vacancy rates for my area using the link you supplied, and it said the vacancy rate is 15.9%. I know for a fact that this is baloney. Vacancy rates, which I've verified through multiple sources (state and local reports, real estate professionals, city staff) and know firsthand, because I've lived in the area for 35 years (many of those as a renter), are 3-4%. In fact, there was an editorial in our paper within the last week bemoaning the lack of affordable, good rentals in this perpetually low vacancy rate city and the state as a whole. Sooo...I question the veracity of the data being reported on the site you are using. The MF I'm buying has a historical vacancy rate of 1.5-2%, and that has typically been to hold certain units open while rehabbing between long-term tenants. In fact, the building I'm buying actually has a short waiting list of interested potential tenants. Personally, I would not buy a property in an area with 17% vacancy rates. But again, I question the veracity of the data on the site you posted.

Roy N. · Answer

Brady:

I would be considering that course of action, but first I would pursue answers to some of the questions raised by Ned and Steve: 1) Are the vacancy rates you are referencing accurate?  2) Why has the one half of the duplex been vacant for so long?  {Is it due to the vendor or the market}. 3) What is the trend for vacancy rates in the area?

These are normally things you would try to determine before placing an offer, but sometimes we are already dancing before we get all the details on our partner.

It is hopeful the 17% vacancy rate is overstated - Ned has cast dispersions on the dataset provided by that source.   I would try to find a local source of vacancy numbers in the area - drive around (if possible), look at "for rent" advertisements, contact local PMs or realtors, etc.   If the vacancy rate turns out to be more in the 10-12% range, it's still high, and your numbers won't be as attractive, but the property will still be workable  {provided it is not trending up as the result of declining economic prospects in the area}.   This is where you work to position yourself as "the best bang for the buck" - a little under market rent and, perhaps, with amenities your competition does not offer (say a dishwasher).

You are far enough into the deal that, in your shoes, I would be obligated to verify and ensure it was not workable before pulling the plug {for the sake of reputation}.

Ned Carey · Answer

@Brady Hanna that may be the site I saw earlier and I thought the vacancy numbers were way off.

It says the average rent in an area I am looking to buy a 5 unit building is $303. That is 1/2 to 1/3 of what rents really are.  Based on that I have trouble giving the data much credibility.

Steve Babiak · Answer

The real questions are: How long has the second unit been vacant, and how hard has the owner been working to place a tenant?

Could be unit 2 has been vacant for a long time, or the owner isn't trying to place a tenant (under the assumption that an owner occupant would buy and want to live in the already vacant unit).

Roy N. · Answer

Brady,

Yes, it can.   But the real test is do all the operating expenses (insurance, taxes, utilities, services {garbage, lawn/snow, etc} plus your maintenance/CapEx and property management allotments fit into 50% of your new gross revenue (scheduled rent minus vacancy).

Not everyone includes vacancy in their 50% ... some deduct it from the scheduled rent first .... in the end it means the same.

If you already had 27 - 30% of allocations (vacancy, CapEx, PM) factored into your 50%, then the remaining operating expenses can be no more than 20%.  When you add another 7% vacancy to that, you are left with an allocation 13 - 15% for operating expenses.

Ned Carey · Answer

@Roy N.  I ask because a while back someone mentioned a site that have vacancy stats by zip code. I checked it out and the vacancy numbers didn't  jive with my experience.  I think they were counting boarded up houses as vacant.

Not all properties that are vacant are available for rent.

High Vacancy Rates-Should I Buy??

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