Vacancy Rates? What do you do?

Question

Hi All! When it comes to vacancy, what are you doing with the loss for that while your unit is on the market?

For example, I have a unit renting for $950 a month, which means daily it is around $32. If a week is vacant, that's $224 that I lost! How can we recoup that?

Or is vacancy just a cost of the business?

Stephen Brown · Answer

The general rule of thumb is setting aside a month's worth of rent each year to cover for vacancy if you want to be very cautious. In this way you can have cash while you update your home for the next renter and find that next renter, which should take about a month.

Michael Montana · Answer

I'm fairly new to all this but with two rentals...I don't really believe in a flat % anymore for the different categories. %'s can give you a general number; however, I like to work backwards. For example, I plan for one month vacancy a year. I take my expenses for one month and divide that by 12. I will save that much each month and it will be set aside for vacancy. Same thing for Cap Ex and Maintenance. You should have a general idea of which CapEx items are coming up...so if you know you need a new HVAC in 2 years. Divide that expense over 2 years...set it aside for HVAC.

But to answer your question, yes. I do believe it is a part of doing business.

Dan Maciejewski · Answer

You don't need anything fancy.  You can make your own spreadsheet, use one of BPs, or find one online.  Here is a link to one -- scroll to the bottom of the page and use either the 30 (year) or 15 (year) excel workbooks.  Check for errors -- they're not all that fancy!

4% is accurate for me right now, but I still use a month for calculations.  That's 8.33% or round up to 9%.  And I spread that out over the year. That's gross rents - 9%. I do not try to add up all the expenses.  Utilities should be effectively zero during a vacancy, lawn care doesn't change, insurance doesn't change, debt service doesn't change, etc. . . I already have an advertising budget (also effectively zero in this market).

Remember, your budget is your plan and your P&L is your reality.  Update your budget monthly, quarterly (or at least yearly) off of your actuals on your P&L.

Scott M. · Answer

Yes, vacancy is just a cost of doing business and it is in fact a cash flow killer.  That is why it is important to plan for it and make it part of your projections so when it does happen you have at least accounted for it.  Also, something to take seriously when dealing with tenants.  I have seen rental property owners refuse to do some cosmetic things inside of a property for a longer term tenant. Not only did they have to do that item to prepare for a new tenant but a lot of other things and had holding costs to boot (utilities, taxes, lawn care, cost of new tenant).

Don't forget vacancy isn't just the lack of income but an increase in expenses as you are covering everything while the home is vacant.  So that 224 a week is only 1/2 side of the income/expenses.

Dan Maciejewski · Answer

Yes.  Vacancy is a cost, just like CapEx, R/M, debt service, property taxes, insurance, utilities, management, marketing, etc. . .   You need to factor all of those in in your initial estimate to see if the property makes sense as an investment.  Then budget for them after purchase!

Otherwise you will have a bad time if there's an expense that you didn't budget for!  Whether it's vacancy, or a broken dishwasher, it should be in the budget, then tracked in the P&L for next year's budget!

Darius Ogloza · Answer

It's important to go into an investment with the right set of expectations; otherwise, your experience will be one of complete misery from beginning to end.  The way you phrased your question, it seems that you are thinking of rental homes as if they were bonds which pay a coupon every month.  Rental homes are not bonds.  Over time, your income stream will change, sometimes from month to month and from year to year as your expenses increase or decrease, your capital expenditures mount and yes, you experience vacancies.

Vacancy Rates? What do you do?

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