Hello Mr. Collier,
I hope everything is going well with you.
Would you mind answering the below questions? When looking at purchasing a property what economic occupancy do you look for? Is economic occupancy more important than physical occupancy to you?
Economic Occupancy is far more important than Physical Occupancy since it is Economic Occupancy that pays the bills, property taxes, utilities, payroll, and mortgage!
Economic Vacancy (the flip of Economic Occupancy) is:
GPR: Gross Potential Rent (if all apartments were rented at full market rate)
less Physical Vacancy
less Bad Debt
less Concessions (waived fees, 2 weeks free, etc. Can also include non-revenue apartments like Models, Manager unit, or onsite courtesy officer unit, though some feel these should be charged to Marketing, Payroll, and Security respectively in order to get a more accurate estimate of operating expenses)
less LTL (Loss to Lease i.e. The practice of keeping existing renters at below market rents at renewal time in order to encourage them to stay)
Generally:
Physical Vacancy runs 5 to 7%.
Bad Debt should get at or below .5% by EOM (End of Month; if it doesn’t either your staff needs training in rent collection or you need to raise your credit standards).
Concessions can vary tremendously by market and even time of year but 1 to 3% is not out of line (too many concessions for too long, check to see if rents are above market).
Loss to Lease should not be more than 1 or 2% of your total rent roll i.e. If your rent is $1,000 per month you should not be giving more than $20 to $50 off (1% of $1000 per month rent is only $10 BUT since LTL is calculated off entire rent roll and typically only 50% of Residents renew each year so 2% of half your Residents leases is only 1% off the entire rent roll.
Closing Thoughts:
There was a time in my life when I preached both real estate and entrepreneurship like a religion, believing it was a viable path for most if not all. Of course, back then I was young and had no family for which I was responsible and perhaps as importantly, had yet to fail badly. Life and real estate have been good to me, very good, BUT in the intervening years I’ve had my hat handed to me more than once, indeed lost millions of dollars multiple times. Suffice to say there were rather stressful events. As a result, I’ve grown wiser and have a much deeper understanding of both the depth of commitment, energy and time required to be an entrepreneur (I do not recommend starting a business to anyone who wants to have time for a family anytime soon; 80 and 90 hour weeks are not conducive to being a good parent/spouse) AND the degree of risk involved (Florida homestead law protects your home against all creditors save your mortgage holder but it is unusually generous and the stigma of bankruptcy can linger for many years).
As always, I share what I most want/need to learn. – Nathan S. Collier