underwriting vacancy amount

[Jason Malabute]

One of the biggest concerns when underwriting is when increasing rents by over 100 dollars and doing value projects, how much should vacancy increase in year 1. I talked to more experienced investors. Experienced investors said vacancy should not drop by more than 2-4% because you should prioritize occupancy over rent increases. They said in a value add situation, you never want your occupancy to drop below 85%.

I agree with them all. On paper, that makes perfect sense to control vacancy even during a big reposition. However, with that said, these investors have 30 years of experience and are not doing their first multifamily deal. I think if you’re doing your first multifamily deal, you cannot expect to operate your first deal like somebody who has been investing for 30 years.

That is why I decided that if we end up with a deal that increases rent by $100 after the value add, we will increase vacancy to 20% in year one and we will have a dialog with our property manager to confirm if our expectations are realistic. Then we will then project to increase occupancy by 5% every year until we are stabilized at 95% occupancy in year 3. I would rather be conservative than sorry.

[Chris Seveney]

@Jason Malabute

Finally. It’s nice reading on here someone who takes the conservative approach to reduce some risk. Far to often I see people take best case scenario and leave no wiggle room.

Vacancy can also depend on types of repairs. If it’s taking old units and updating them during turnover vacancy is not as bad as say redoing a roof or repiping a building which causes a nuisance for the residents with all the ongoing construction. Large types of projects typically lead to greater vacancy from my experience.