How To Handle Vacancy?

[Robert Leonard]

Hi everyone, I am a relatively new RE investor. I have completed one deal (buy and hold turned into a fix and flip) and I am in the middle of my second deal (house hack turning into buy and hold). 

I have listened to many of the BP podcast episodes, read many articles, attended a few webinars with Brandon Turner, and I just bought Turner and Dorkin's new book (I have not read it yet though). However, one lingering question that I can't seem to find a concrete answer to is how to handle vacancy costs. 

I know when you are running the numbers on a deal you put an estimated % into vacancy costs, but how does this truly help in the event of a vacancy? For an easy numbers example, if you put 4% vacancy costs (this is the number Turner used in the last webinar I attended) into your formula when running the numbers, and the monthly rent is $1,000 and the mortgage itself is $400. That is only $40 per month set aside for vacancy costs; it would take 10 months to have enough set aside in a "vacancy reserve" to cover the costs of just the mortgage payment for ONE month. If this is your only property, there'd be no other rental income to cover these costs, so it would have to be paid out of pocket for the owner. 

Is this where having enough personal reserves come into play? Or how do investors handle this situation? One unit vacant at a cost to the owner of $400 per month is not a huge deal, but what if you own 7-10 units and maybe 3-4 are vacant for a few months? Now the owner is out of pocket $1,200-$1,600 per month... It starts to add up quickly. 

Any information/clarification you can provide is greatly appreciated!

Robert

[Matt Crusinberry]

@Robert Leonard, There are a couple different strategies out there you may choose from to support the vacancy you may incur. I personally use the percentage route myself, for my area. Every area is different, and you can find the appropriate percentage rate on google or asking your local PM's. You are correct in your assessment that you will need to pull out that vacancy rate until you have enough (or an amount that gives you a warm and fuzzy) to pay your necessary bills for that property while it is vacant. 

Having reserves on hand is also going to be very helpful, as there is always risk with any investment. I would recommend doing both, setting aside funds to support things that may pop up and pulling out a vacancy percentage. The time is going to be different for everyone, much like the percentage, location dependent. I hope this makes sense, and please feel free to PM me if you would like a more specific answer or if you just have further questions. Good luck!