In helping clients to determine the suitability of a purchase, be sure that their due diligence includes an estimate of vacancy and credit loss. You can be sure that most lenders will take this into account also.
- Determine an expected percentage of loss due to vacancy and non-payment by checking that of comparable properties and the recent loss experienced by the subject property.
Last year's vacancy and credit loss from the subject property may have been 3% of net operating income. Other comparable properties experienced an average of 4%. Choose a value in the mix, let's say 3.60%.
- Adjust your net operating income for next year by any anticipated rent increases. If you are anticipating a 5% increase in rent, and net operating income this year is $44,000, then:
$44,000 X 1.05 = $46,200
- Calculate the expected monetary loss for next year due to vacancy and credit losses:
$46,200(net operating income) X .0360 (3.6%) loss estimate = $1663.20.
What You Need
- Some estimate(s) of vacancy and credit loss percentages