Vacancy and your bottom line

[Account Closed]

Many take the time to analyze a deal before purchasing, but I actually find few out there that really understand the factors that effect their real estate business.

Not sure if many here would feel it is worthwhile, but it is possible to determine your break even vacancy level as well as your margin of safety. Some rental markets are more volatile than others, some expenses may increase unexpectedly, you may decide to change the way you manage a building all of these can change your cash flow.

Break even also allows you to understand at what level a property must perform in order to achieve a certain level of profit.

I throw this out because it something that can be modeled and potentially be made available to members that might be interested. Any comments, thoughts, hey yous :D

[Account Closed]

For residential rental I have at least a marginal control over vaccancies. I can evict, and I can lower rents to fill a unit if I have to.

I have no control over tenants who decide to move out or lose their jobs, and I have no control over the quality of the tenant pool.

I have a few repairs and maintenance that I can budget for. Since the majority of repairs are for tenant damage, it's hard to predict how much that will cost because there is no way to guess what they are likely to destroy--- and they can be very creative about destruction.

So I do not get over-extended, I keep my credit in excellent shape in case I ever want to borrow, and I screen like crazy before I let a tenant in.

For commercial real estate, there is a reason that is a game for the big boys. Vacancies can last literally for years. "Build to suit" which is very common in commercial, is outrageously expensive. Worth it if your tenant stays for decades; hard to pay for if your new tenant goes bankrupt within 6 months.