I-A-Q #17: If You Sound Like an Investor, You’ll Be Treated Like One
Happy Monday!
Here is an Idea, an Action, and a Question to consider this week.
Idea
A large part of your success as an investor-agent will depend on how well you’re able to understand and communicate important Real Estate Investment (REI) terms and concepts.
If you can’t effectively communicate with investors, you probably won’t make it very far as an investor-agent. You have to be able to speak like an investor. And to speak like an investor, you need to learn the lingo.
Today’s REI 101 Lesson: Vacancy
When I analyze multifamily residential properties, I always look at the physical vacancy and the economic vacancy of the property. And not just a cursory glance––a deep-dive into the true vacancy state of property.
Physical Vacancy
This term tells you how much income you’re missing out on due to not having tenants in your properties. It can be shown as a percentage (as a vacancy rate) or a dollar amount (as a vacancy expense). For example, if I have a ten-unit apartment complex, but one of my units is vacant, I have a 10% vacancy rate. If I could charge $1K for that unit, the vacancy expense is $1K––it’s an expense on my financial statement because it’s a missed revenue opportunity. For single-family residential long-term rentals (LTR), I often budget for an 8% vacancy rate, which equates to my property being vacant one month out of each year.
Economic Vacancy
Economic Vacancy refers to the difference between a property’s gross potential rent and actual rent achieved. There are three main categories to consider here:
Concessions are a special promotion given to a tenant in exchange for something else of value to you. For example, I might allow a police officer to live in my apartment complex at a discounted rate because I want their squad car present for safety. If my market rent for a unit is $1,200/month and I charge the officer only $700/month, I would have a $500 Economic Vacancy expense for that unit.
Bad Debt occurs when tenants are behind on rent or fees owed. If a tenant has a rent of $1,500/mo and hasn’t paid their rent over the past two months, then that tenant would show $3,000 in bad debt.
Loss to Lease is the difference between the market lease rate and your current tenant leases. If I have ten units leased at $900/month but the market rent has increased to $1K/month, I’m showing a Loss to Lease of $1K/month ($100 per unit)
Seek to understand these important REI concepts. Because once you sound like an investor, you’ll be treated like one.
Action
Go to loopnet.com and pick out three properties. Compare the vacancies on their profit and loss statements. Sharpen this skill.
Question
What long-term vacancy loss are you using in your proformas?
See you next week,
Matt “Roar” Gardner
Real estate investor-agent, Author of Supersonic Real Estate: Light Your Afterburner to Accelerate Your Investor-Agent Career (Coming Soon!), and keynote speaker
