Urbana, IL · Member since 2012 · 1k+ posts · 425 votes
I'm curious as to some small details in running numbers some of you do.
I've been running numbers in the BP buy and hold calculator versus another speadsheet an investor gave me. They both are very helpful and give out almost the same information. One thing I do notice is where/when the vacancy is taken out.
Is it more wise to take a 10% vacancy off of total income (units + laundry + misc) or do you take 10% off of just the units? And is it preferred to not include vacancy in expenses but instead as part of your total income, or does it not matter? Is that just an aesthetic decision in your speadsheet as you're running numbers?
Reason I ask is its sending me slightly conflicting results. Its not a huge difference in smaller units with low turn over but as vacancy rate increases I think it really adds up.
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
12y
If reduced vacancy will impact gross income on non-rent items (like laundry), then I imagine you'd want to include the 10% loss across all income. On the other hand, if reduced vacancy won't impact income from those other sources (for example, storage that's only used by 5% of the tenants), you should probably not reduce income across the board.
Investor · Sarasota, FL · Member since 2008 · 18k+ posts · 17k+ votes
12y
If reduced vacancy will impact gross income on non-rent items (like laundry), then I imagine you'd want to include the 10% loss across all income. On the other hand, if reduced vacancy won't impact income from those other sources (for example, storage that's only used by 5% of the tenants), you should probably not reduce income across the board.
Real Estate Investor · Boston, MA · Member since 2013 · 108 posts · 71 votes
12y
when we're underwriting larger transactions, we only apply the vacancy number to the top line Gross Potential Rent. Then we look at historical (if available) numbers for Other Income (laundry, late fees, app fees etc) and underwrite to a conservative estimate of total Other Income.
Rental Property Investor · Toronto, Ontario · Member since 2012 · 538 posts · 298 votes
12y
Not to hijack this thread but on a related note;
The general 50% expense rule takes into account vacancy of, I believe, 10%. That accounts for the reduced expenses due to maintenance, utilities, etc. But shouldn't you ALSO be reducing the gross income by that amount as that has a much larger impact on the NOI calculation.
Real Estate Investor · Boston, MA · Member since 2013 · 108 posts · 71 votes
12y
As has been posted elsewhere - you need to be really careful when using any of the "Rules of Thumb" espoused in REI - 50% Rule, 1% Rule, 2% Rule etc.
Use these Rules of Thumb as screening tools to know if a deal is worth looking at a little more closely.
Once you get into the level of due diligence that the OP is asking about, you're breaking down the underwriting into each specific line item, based on historical operations of that actual property, or on your assumptions about the current "market" rent, expenses, vacancy etc.
Investor · Northridge, CA · Member since 2012 · 249 posts · 73 votes
12y
I multiply the rent by the occupancy rate.
As we speak i'm analyzing a deal where the rent is $900/mo, in an area which typically sees a vacancy rate of 10% - which translates to a 90% occupancy rate
90% of $900 is $810 and that's the number I use for my analysis
Investor · Chicago, IL · Member since 2013 · 227 posts · 31 votes
12y
When I run my numbers for a prospective building, I go to sperlings bestplaces.net to figure out what the vacancy rate for the city is and subtract that number from the total gross rent.
I think its overly conservative in reality, but It gives you an idea of what the numbers might look like.