Tracking Vacancy Rates - what is the true cost?

Question

Hello BP!

I'm new at investing as of this year and need some advice on how to track vacancy expenses. I'd like to look back on my first year and see what I spent on turnovers & vacancies....but so much goes into turning over a unit so I'm struggling with how to categorize my expenses. Here's some examples:

# of days the unit sits vacant - does anyone calculate the rent rate * number of days vacant and put that in as an expense? you're not really paying it as a bill, but it's lost income. I'd like to see this number at the end of the year, but not sure where to put this?

Capital Improvements - I've spent a lot this year improving units during vacancy turnovers. Obviously, these are long-term improvements on the property, but they were caused by a vacancy. Do I track this as a vacancy expense with a sub-category for capital improvements, or is that doing too much? There are also bigger expenses I did like put in fans, redo floors, etc. that are longer-term improvements, but then I also did small like blinds that will probably always need to be done between vacancies...do these get categorized differently?

Utilities during vacancy - is this a utility charge or a vacancy charge?

I'm trying to organize this the best I can in year one so I can know moving forward knowing what the true cost of a vacancy is. What do you all do? Any advice is greatly appreciated?

Would also take referrals for a good bookkeeper! Realizing now that I'm spending too much time with this, thanks so much!!

Tom Degroodt · Answer

@Dylan Favazza

All of the numbers will go into different buckets.  I typically use 8.3% for Vacancy when running my numbers.  So 1/12th of the rent goes for the 13th month.  That way you have 1 month to make ready and find a new tenant.  As an investor I consider each rental a bucket.  Then I also consider that there is a bucket called General.

Things that go into my General bucket:

Any and all of your business mileage.  (trips to and from rental, or having to do with the rental. Business meetings with contractors, RE agents, REIA's)

Any charges incurred because of the business ( accountant, storage areas for supplies or tools)

We track P&L on each property.  Income is rent and fees.  Expense is most other stuff.  You will need an accountant on your team.

ONE THING I HAD TO LEARN THE HARD WAY - Make sure you let your accountant know what you plan on doing next year.  Our first year we jumped in with both feet.  We did a big re-hab as well as setting up the business.  I was so proud of myself, telling the accountant that I wanted a huge write off.  On paper we had lost a ton of money.  We legally expensed a bunch of stuff, so much so that we hit the ($25,000) limit that we could use for the deduction.  I was thrilled that I had been smart enough to save over $7,000 in taxes for the year.  Then we went to the bank for the next property.  The banker explained that the $25K loss would need to go against my Debt to Income.  It was basically like having a $2,000/month car payment.  We were frozen from getting any bank loans for a year.  We had expensed some of the re-hab as repair costs to take the full expense that 1st year.  We could have rolled it up into the depreciation and rather than take it all in the 1st year, spread it out over many years.  We would not have saved as much in taxes, but we would have been able to add 1 or 2 more rentals the next year.  The accountant did what I had asked him and found

Mike Dymski · Answer

Tracking vacancy (and Loss to Lease) is common practice on commercial P&Ls.  The Market Rent line on the P&L contains, well, market rent and the Vacancy line accounts for uncollected rent (they net to collected rent).  The bookkeeping system invoices Market Rent (whether actual invoices are sent to the residents or not) and the shortfall to Market Rent is charged against the invoice in the Vacancy P&L line.  You can also simply do this in Excel.  Tracking vacancy dollars is important, particularly when using 3rd party management.

You can categorize turnover costs in a Turnover P&L account this is separate from ongoing Repairs.  Capex goes below NOI.  Many capex items are less than the $2,500 de minimis safe harbor and can go below NOI on the P&L (and get fully deducted on your tax return but not included in the property NOI for performance or lending purposes).

Hope this helps.

Dylan Favazza · Answer

@Mike Dymski helps a ton, thanks for breaking that out!

Dylan Favazza · Answer

Appreciate the thoughts and advice here @Tom Degroodt

Basit Siddiqi · Answer

@Dylan FavazzaYou don't get a 'deduction' for vacancy.'vacancy' is rent that you did not collect.The gross rental income that you report is less if you have vacancy.

Dave E. · Answer

@Dylan Favazza honestly, my cpa handles the taxes. Lol. I don’t worry about the details. I just track the numbers and give him the info.

Dylan Favazza · Answer

@Colleen F. Super helpful! Updating my books now with a subcategory under vacancy for turnover costs. Great points, appreciate the quick tips

Colleen F. · Answer

@Dylan Favazza  No you don't put vacancy in as an expense because it is lost income you won't report on your taxes, putting it in as an expense for tax purposes means you are charging it against rent you don't collect.

If you want to track vacancy cost for your own purposes include the lost rent and utilities you pay. You could also include the cost of a repaint or other minor make ready charges that are earlier then the useful life  of items like paint and carpet but the more accurate term for this is turnover cost.  These are costs that don't improve the unit and are extra soley because of move out after a shorter term. When people say vacancy is costly these are frequently the costs they are referring to.

Dylan Favazza · Answer

@Dave E.

Thanks Dave! Makes sense, definitely helps simplify. So for accounting/tax reasons, do you actually put a line item expense for # of days it’s vacant? And do you calculate it off the old rent rate or new rent rate? Is lost rent a tax write off?

*newbie forgive me, this is my first tax year.

I might be getting too granular, but I guess I’m also looking to see the “true cost” of a vacancy. I always put 5%-7% when running my numbers, but what is it really? A lot of extra trips and extra expenses are incurred around a vacancy. I’ve been fully occupied the last two months and I’m amazed looking back at how much time and money I had been spending on little things to finish and fill a unit.

Dave E. · Answer

@Dylan Favazza I alway look at vacancy as the cost of the vacant unit. So just lost rent and utilities. Everything else you mentioned is either maintenance, or cap ex. All should be tracked so that you can make sure your numbers make sense and that you are planning and getting a return on your investment.

Tracking Vacancy Rates - what is the true cost?

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