All Forum Posts by: Nancy H.

Economic vacancy is the difference between gross potential rent (assuming market rent and 100% physical occupancy) and actual gross rent. It is a combination of all vacancy factors (physical, loss to lease, collection, concessions, non-revenue units, etc.)

For example: your subject property rents for $600/mo/unit and consists of 100 units (for simplicity of math). It is 95% full.

If the current economic vacancy is truly 5%, your current gross rents should be $57K.

Now you look at the surrounding properties and determine that they charge $700/mo for a better quality unit. You want to upgrade your units to be able to charge that price and that is your bench mark: $700*100=$70K/mo gross potential rent.

So, your immediate economic vacancy is $70K-$57K = $13K/mo or 18.5%

Now you take your new gross potential rent and subtract physical vacancy of 10% (long term assumption), 2% for collection losses, 2% for bad debt, 1% for non-revenue units and concessions. Your future gross rent becomes $59.5K. That's the long term number you should use for your underwriting.

However, you will not get there immediately. Once you take over and start increasing rents some people will move out, some may stop paying, etc. So, your initial economic vacancy may rise above 15% easily (it is at 18.5% already. see above). Again, you calculate a new vacancy factor, apply it to your projected gross rent and arrive to a first year projected NOI (don't forget the expenses!)

Then you use your projected NOI, market cap rate, and cost of needed repairs to determine the offer price.

Nick thank you for the excellent explanation. The NOI stated from original post is calculating economic vacancy at 13%. I will make note to you comments and save this for future reference.

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Originally posted by @Nick B.:

@Nancy H., 5% vacancy is too low. We had a big discussion about it in a separate thread and it seemed that many people (myself included) paid too much attention to physical vacancy (which may be 5%) and neglected economic vacancy that should be assumed as at least 15% of gross potential rent on a stabilized property.

Based off of what @Brian Burke provided you on the calculation of Economic vacancy we are calculating it at 13%. So that would be at 2% less than what your recommendation would be. Thank you for the information it has provided clarity on a few numbers I was still having issues understanding.

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Originally posted by @Nick B.:

I am confused. I read many articles here on the BP forums about calculating vacancy rates but have not read anything on calculating vacancy at 15% due to economical vacancy. Could you explain more about this calculation and how this might differ from other things like loss of lease and physical vacancy?

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@Stacey Hampton

The apartments are less than 500sqft. All units have the same exact layout which allows me to buy in bulk. I have also put have a reserves fun for additional repair expenses calculated in my totals. I have received recent rent rolls and see that there are currently 2 tenants that have not paid in full this month. This seems to be the norm is 1-5 tenants behind on rent.

@Alberto C.

Rate on mortgage is 4.5% currently and am putting 30% down. Like I mentioned to @Stacy Hampton, the apartments are smaller than 500sqft and have the same exact layout for each one. This allows me to buy in bulk and take advantage of discounts. In the expense number includes the following: Utilities, Payroll, advertising, contracts, repairs and maintenance, administrative, property tax, and insurance. This NOI is calculated with 5% vacancy.

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The deal was found with an agent I have been working with for over a year now. I have spoken with different management companies both large and small in the area and other agents about the market specifics. The information that I collected is that the market in the area is a solid market and had been growing over the years.

I am an out of town investor from California. The management company I am working with is one of the largest in the area and has shown a lot of evidence in turning troubled property into solid performers. I have never worked with them before as this is my first deal. There will also be onsite management team with a repair person which is already calculated into the expense.

Apartment turns are priced about 250 per unit for clean paint and minor repairs. Upgrades I estimate around 1200 which consist of cabinets, vanity, laminate floor, and granite upgrades.

Comps that I have been looking at are based of web searches, phone calls out to competing units, and physical visit to the competing units to see what is offered. I have asked competing unit on pricing and availability from onsite management and have requested pamphlets on the units and pricing. The property that is the closest competitor based on size of units and offering is 50$ over my current rent and is not including all utilities paid.

1 Vote

Originally posted by @Seth C.:

Check on rent concessions which will drive economic occupancy way down. 3 months is way too short for proper vacancy analysis, and you must be wary. It is classic to offer free month's rent etc to increase occupancy and then sell right away before vacancies normalize, so you need to have better numbers and a value-add plan in place and funded before moving on this. Don't pay for your own work, and insist on a longer trailing period for NOI/purchase price calculations. My 2 cents from my own research as another new investor.

Management is offering a rent concession for first month as the competition in the area. I have 2 years of vacancy analysis but when asked why the vacancy was previously so high - previous manager stealing rents of tenants that were not reported as contracted. Manager is gone and replaced with new management and from my talk seems knowledgeable and has a good amount of experience in property management. All units are under 6 month - 1 year contract.

On funding I have been currently offered a mortgage of 10years fixed amortized over 30 years with Interest Only for first year. The underwriting shows this property at an 8.2% cap which is based on P&L statements. The cap rate I have is based on a management companies quoted budget on the location + 5% management fee. I wanted to know where I would be operating at.

Value add would include market rent raise of 50$ per unit, charge back of utilities, and charge for parking in line with the closest competitor. If this value add is done by month 13 the bank mentioned a refi and cash out 1/2 of my original investment.

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Originally posted by @Nathan Lenahan:

For C-class properties I would still expect to see a CAP rate closer to 8% in the metro unless this is a pretty solid property i.e. little deferred maintenance, good/great location and decent schools, though buying at 36K/unit is not bad here depending on location.

Location is in the irving area. Property is good shape and the current management has started doing upgrades in some of the units, cabinets, laminate flooring upgraded vanities and such. All units the same size shape and lay out for easier turn.

Are vacancies based on actuals or is that just projected based on vacancy rate for the area?

Vacancy is based on current actual over last 3 months. Previously it was 15% and when asked why it was due to bad management stealing rents as the story goes.

Have there been major capital expenses recently or are there any planned for the near future i.e. roof, boiler, renovations etc?

Roof has been done about 3 years ago replaced and pitched not flat. Boilers are new with in 5 years.

Are there any potential value plays on the property?

There is room to charge back utilities and charge for parking. the units are also 50$ less than the closest competitor in the same size unit.

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Hello,

I am a frist time invester and I have a opportunity to invest in a 103 unit property in the Dallas Fort Worth Texas area.

I would like to accomplish good cashflow and to leverage the property later to invest into another unit. I would like a little feedback and see what you think about the deal.

Property is a class C

Purchase price = 3,725,000

103 units @ 600 month rent w/ all utils paid

NOI 284,801 @ 5% vacancy

NOI includes Management @ 5%

Debt service 120,000

Expense @ 65%

CAP rate 6.95%

1 Vote

All Forum Posts by: Nancy H.

Nancy H. has started 1 posts and replied 8 times.

Post: Analyzing Multifamily in Dallas Texas area

Post: Analyzing Multifamily in Dallas Texas area

Post: Analyzing Multifamily in Dallas Texas area

Post: Analyzing Multifamily in Dallas Texas area

Post: Analyzing Multifamily in Dallas Texas area

Post: Analyzing Multifamily in Dallas Texas area

Post: Analyzing Multifamily in Dallas Texas area

Post: Analyzing Multifamily in Dallas Texas area