We tend to understand vacancy and how it negatively impacts the multifamily investment. For every unoccupied unit, there is a loss of revenue because that unit is not performing. Managers want to fill up their units and limit turnaround in order to avoid costly vacancies as well as the added cost of turnovers.
There is a type of vacancy that is lesser known, and certainly less discussed, among beginning and less-experienced investors. Referred to as economic vacancy, these are the less-visible losses that arise that can negatively impact the investment value. Here are some examples:
Concessions
Concessions occur when the property management team makes certain accommodations for tenants for certain reasons, usually to prevent vacancy or secure a lease. These can be in the form of a month’s free rent, discounted rent, or some other form of concession. The costs of concessions can add up and directly impact effective gross income.
Bad Debt
What good is an occupied unit if the tenant is not paying? No good; in fact, it is worse. You cannot easily turn around that unit to a paying tenant. Bad debt is costly and as collections add up, so do the impacts to net operating income and performance of the property against the business plan.
Concessions, bad debt and other forms of economic loss are silent threats to your property’s potential gross income. If you are acquiring a property and discover high economic vacancy, you likely discovered evidence of mismanagement or under management. Given the right circumstances, these situations present great opportunities to correct a management issue and take advantage of value creation.
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