Updated about 8 years ago on . Most recent reply
- Vacancy and expenses - Rule of thumb when analyzing deals
I have heard that when analyzing a deal its important to be conservative in your numbers. Ex. 50% expenses and 10% vacancies. But when I talk to my brokers and property owners I hear things like "in the miami market 10% vacancies isn't honored when it is truly 100% occupied" or "accounting to 10% vacancies in your numbers is really only helpful with 200-300 unit properties". (Just FYI I am in the process of looking for a 16 unit apartment building in Florida).
When analyzing deals with @Michael Blank deal analyzer it does account for 10% vacancies and 50% expenses. Usually with these conservative numbers the debt ratio is lower than I need to be accepted by the local bank (must be 1.25 debt coverage at a minimum and 1.35 is much better). So I lower the asking price until I get the ratio I need. Usually it will take properties (on loopnet) from listing prices of 2.2M to 1.5M or 1.5M to 1.1M to make the numbers make sense to actually put an offer in.
What is your experience with this? I know deal flow is important for this reason. Should I always stick to my rules of thumb no matter what market I am in (ex. Florida vs Boston)? I feel like brokers and sellers might get offended with my offers because I am seeing a lot of expenses reported anywhere from 10% - 35% but no where near 50%.
Any thoughts greatly appreciated!
Jordan