Vacancy on its own is a curable problem from which many properties suffer. Vacancy also creates much more of a loss than what appears on the surface. Having un-rented units greatly reduces the net operating income of the property and has an exponential effect on the overall value of the property. Credit Loss differs from vacancy in that there is a tenant in the unit however they are not paying their total rental amount or they are not paying rent their rent at all. (This dollar amount is endearing referred to as “The Delinquency” by property managers) This problem is again curable and also severely impacts the net operating income.
Other uncollected funds can also be captured under the category of vacancy and credit loss. In some instances an on-site property manager, maintenance employee or owner may be living in a unit. In the accounting, the property can charge rent to that unit and then credit the charge, resulting in no money paid and an increase in credit loss. Another instance can be a rent credit to a resident. An example of this situation is if a resident has been overly inconvenienced due a lengthy maintenance repair (not on my watch, of course!). A landlord may decide to monetarily quell this uneasy tenant. This type of credit can be captured under vacancy and credit loss. When analyzing a property as an investment, it is extremely important to know what exactly is in the vacancy and credit loss category. Any oversight may result in missing real revenue or double counting a negative. Knowing the details of this number will also assist in judging if and how the amount can be reduced.
As I mentioned earlier, the full impact of this loss is far greater than the mere miss of cash flow for the month. Would you like an example? I thought you would…
We are running Willow Grove Apartments; it has 12 two bedroom units that rent for $1,100 per month.
$1,100 x 12 units x 12 months = $158,400 annual gross potential income.
In this example, over the past year, unit number 4 was vacant for three months and unit 7 was vacant for two months.
$1,100 x 5 months of vacancy = $5,500 loss of revenue (vacancy and credit loss category)
At face value, $5,500 doesn’t seem that painful, especially because it was spread out over 12 months. So you ask “Where are these grave implications of vacancy and credit loss?” The true loss is only revealed when you calculate the value of the building by the market CAP rate. We will say that Willow Grove Apartments is in a 5% CAP rate area.
Gross Scheduled Rent $158,400 -Vacancy and Credit Loss $ 5,500 (3.47%) Effective Rental Income $152,900 -Operating Expenses $ 53,515 (estimated)
Net Operating Income $ 99,385
The value of this property in a 5% CAP rate area is $1,987,700
$99,385 NOI / 5% CAP = $1,987,700.
But what if this property was 100% occupied during last year?
Gross Scheduled Rent $158,400 -Vacancy and Credit Loss $ 0 Effective Rental Income $158,400 -Operating Expenses $ 53,515 (estimated)
Net Operating Income $ 104,885
The value of this property in a 5% CAP rate area is $2,097,700
$104,885 NOI / 5% CAP = $2,097,700.
The Difference?
$2,097,700 -$1,987,700 $ 110,000
When it comes to managing an income generating property, it’s not just about raising the rents. Curing vacancy and credit loss is vital step in increasing the net operating income and the overall value of your property. If you would like more information about property management, please contact me today.
Vacancy and Credit Loss is the amount of revenue that remains uncollected due to un-rented units and current tenants that are not paying their full rental amount. In general, vacancy and credit loss is a combined annual figure which is expressed as a dollar amount and as a percentage of the Gross Scheduled Income. Historical data from each specific property should be used to calculate the future vacancy and credit loss amount.
