When purchasing a multi-family or other rental property, part of the due diligence on the financial side is the careful examination of all financial reports, profit and loss, assets and liabilities. One of the items an investor must give some attention is the vacancy and credit loss history of the property. If the seller cannot provide adequate records to indicate their vacancy rate, as well as the non-payment history, be very careful.
Assuming the seller has great records, what has been their historic vacancy rate? Let’s say that records show a rate of 6% for vacancy. If this were a six unit property, that would only be about 4.32 months of vacancy out of the 72 month rental year. However, if the average rent is $900 per month, this is $3888 in lost revenue. And the vacancy rate could be higher.
Whatever it is, don’t just take the last year as an indicator. Look several years back and see if there is a trend in either direction. If vacancy has risen over the last couple of years, factor in an increase for the next year for your valuation research. Don’t’ stop there either, as you should try to find figures for comparable properties in the area. This is more difficult, as landlords don’t advertise these numbers. A search on the Internet for “apartment vacancy rates” yields a great deal of data, some of it specific to urban areas.
If the property you are considering has a vacancy rate significantly lower or higher than others in the area, determine the probable reason(s). If higher, is there something you can correct or change economically that will bring it more into line with others, as well as increase profitability. If lower, you might want to tack a little on to the number you’re using for the valuation to provide a “worst-case” scenario.
When examining the non-payment of rent, or credit losses, it isn’t just numbers. You might even have to ask the seller some questions about how they go about rent collection, particularly when a tenant becomes delinquent. If the seller is a bit laid-back in their style and collection practices, you can possibly look forward to better results with a strict policy that’s enforced with speed. Of course, a firm grasp of your legal rights and responsibilities as a landlord will go a long way in this regard.
The important thing is to make the vacancy and credit loss numbers a part of your due diligence and financial evaluation of any rental property. It could save you from a financial mistake or it could show you hidden opportunity in a property.