underwriting vacancy amount

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.