A Discussion About Calculating Vacancy

[Aladdin M.]

Let me start out with I am not new to cashflow analysis, BUT the one issue that I keep revisiting and have not found a great answer for is why 5% vacancy. When I get sent wholesale or turn key properties and I go over their proforma (if they send one), I tend to see 5% vacancy. When I hear an REI podcast, I hear things like "just put down 5% for vacancy". I don't understand the logic. I just had a back and forth with a turnkey property marketer where the seller told me that if I use the number I use and make the assumptions that I do, I won't make any money in real estate investment. This might be so, or it could also be a sales tactic depending on how confident I am in my analyses. So, again, no one has been able to give me sound logic as to why they choose 5%.

I choose 8.3% and let me impart my logic.

It isn't too far fetched to assume that if you own property, there is a possibility that someone will not want to renew their lease.  It is also safe to assume that this could happen once a year.  Now, if this does happen too many times, yes there is an argument to say that the right tenants are not being sought or that your property happens to be next to a college, but regardless, the scenario exists that someone may not renew their lease.  Now if someone does not renew their lease it is safe to assume that it could take up to a month to clean, repair, market, and re-sign a new tenant. So, if this is the case, then 1/12 = 8.3%.  I actually think it is safer to assume 2 months which is 16.6%, but that may also be doomsday thinking.  8.3% is only 3.3% more than 5%, why would my real estate career be at stake if such a small percentage is used to account in my favor.  If I find property that works with my numbers (and I have), why couldn't I adjust my vacancy rate down once I have proven vacancy numbers and pocket the difference?

Can anyone with more savvy than most give me a sound reason to choose 5% over 8.3%?

Thank you kindly in advance.