Please critique my Vacancy Allowance formula

[Jayson Trierweiler]

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.

[JR T.]

@Jayson Trierweiler Your instincts are absolutely correct that you should pay very close attention to your numbers, understand every aspect of them and have good models of how you will survive the next downturn. That's what keeps you in your real estate instead of driving you into a bankruptcy court.

Vacancy is very difficult to predict because there are so many variables. The best you'll be able to do is calculate a vacancy average across your entire portfolio and then as new data flows into your business make sure you recast your projections to reflect all of the information available. 

Do you have experience with this property manager that indicates they'll flip a unit that requires inside work in 45 days? Are you close enough to these properties to get involved in the projects when necessary to keep small tasks from being skipped or stalled due to lack of an owner's eye for supervision?

Lots of variables. You just keep plugging them into your formula and eventually you'll have a strong pricing model and hopefully a responsible leverage reduction program. You can only survive a downturn if you have reasonable leverage on the properties. Decide if you want to be a big shot next year or a REALLY big shot in 20 years. Two different mindsets only one is suited for long-term survival.