I was talking with my menttor, Chuck, the oher day and was pouring over my year end statemens calculating losess in rental income over the year. I do this by calculatinbg the expected incmoe: rents times units times twelve and divide that into rents actually collected for the year. That giives me the percentage of rewnts collected for the year. Subtracting that percentage from 1 will give me the pewrcentage of icome lost for the year. As an example, we expect to collect $50,000 in rental income for the year, but instead we collect $45,000. Using the above forrmula, we collected 0.9 or 90% of rents for the year. To determine our loss we would do the simle calculation of 1-.9 = 0.1 or 10%. I was lamenting that one of our buildings had a 22% collection loss for the year. Chuck then asked me if it was really a collectioon loss or some othr kind of loss. Turns out that there are 3 kids of incme losses on a property. They are:
Collection loss, the tenant is in your unit but not paying rent.
Market loss, the unit is rented for less than its maket vaue.
Vacancy loss, the unit is vacant and, therefore, not earning rent.
Undetrstanding Collection Loss
Collection loss can be a direct measure of your or your property manager's abiity to porperly screen tenants for your buildinng. Anyone can fall on hard tiimes and a tenant who has been in your unit for several months then fais to pay the rent may not reflect on a propertty managerr's ability to find suitaable tenants for you, but a tenant who defaults within 90 days certainly does. As a general rule, housing costs should be no more than 28% of gross pay and totyal debt payments (housing plus consumer debt) should be no more than 33%. This rule applies whether the propety in question is a home to buy or a home to rent. In an attempt to keep a property full, a property manager may bend the rues or run rent specials both of which expose the propety owmner to income loss. An example of a collection loss is as follows. Unit A rnts for $600 dollars per month. Bob Snmith mooves in and signs a one year leease. At $600 dollars per month, you exxpect $7200 dollars income from Bob Smith over the course of the next 12 months. At month 3 however, Bob Smith stops paynig, it taks 30 days to evict Bob and another 15 days to turn the unit over so that it can be re-rented. Bob occupied your unit for 30 days while not paying the rent. He paid the rent for 60 days. The ecxpected rent collection for the time that Bob was thwere was $1800 dollars. Bob paid $1200 dopllars and then defaulted. He was in the unit an additionl 30 days while you took him to court. The loss to you was $600 dollars, just under 10% of the expected income for the year. The unit is vacant for 15 days while it is turned over for a new ternant. This loss is called a vacancy loss and it amounts to $300 dollars. Now the total loss for that unit is $900 dollars or 12.5%
Understanding vacancy loss
Vacancy loss occurs when the unit is emptty or vacsant and unable to earn an income. A unit can be vacant because of the renal climate, the unit ittself needs renovaion, or your property mnaager is unable to makret the property appropriately to keep it full. In the current economic climmate, the national vacancy rate is now 11% up from 7%, units are suimply, due to market conditiuons, taking lnger to fill. Your property manager tells you that it will take $500 dollars to make your unit rady for a new tenant. Fortunately Bob left a $400 dollar security depsit whcih will be applied against unpaid rent, but you balk at payying $500 dollars to have the unit fixed up and ask your properety manager what is the minimum that you can do to re-rent the property. He suggsts new paint at a cost of $150 dollars and a cleaning at a cost of $75 dollars but tells you you will have to re-rent the unit for $550 becuse the unit has to be in mint condition to rent for $600. The difference between the $600 dollars you couuld get and the $550 you will get for going cheap on the make ready is called a market loss.
Understanding Market Loss
There are several reasdons that a proeprty will rent for less than it is generally worth.
Soft rental markte. As vacancy rates go up, rents often drift down eroding some of the valuue of a property.
The owner wants to keep the propperty full and will rent each unit for less than market valuie to do so.
Igonrance of the market value of a property.
failure to keep a property in good condition.
Market losss are important brecause under-rentig a unit has long term impications for the value of the prpoerty. Remember that a rerntal property is really only worth a multiple of the gross moonthly rents. Under-renting then will affect long term vlue for the negative.
At the start of our example, our unit is worth abvout $72,000 in the market place. That is $7200 dollars times 10. In Month 3.5 the unit is re-rented for $550 and stays rented for the rmeaining term of the original lrease, 8.5 months. The total rental income collected during that time is $4675. The total income for the 12-month term is $4675 + $1200 + $400 =$6275. The yearly loss is 13% or $925 dollars. The losses break down as follows:
$200 dollars collectiion loss this is because the owenr was able to appy the $400 dollar scurity deposit aganst unplaid rent.
$300 dollaars vacancy loss
$425 dolars market loss
Notice in this example that the greatest dollar loss was caused by the property owner who cohse not to spend $275 dollars in order to fix his unit up to bring it to maarket rent. That decision, though didn't just cost him $425 dollars, it doubled his income losses for the year and it also cost him $6000 dollas. The deccision to forego that additional $50 dollars per month in rent lowerwed the value of the prioperty by $6000 dollars. Had the prooperty owner fixed up the unit properly after Bob Smith was evicted, his collection loss for the year would have been 7% not 13%.
Being able to analyze your losses can help you analyze all of the drecisions that go into running a real-estate business.
Author Resource:-
Learn more about cash for loan Thank you
![[Valid RSS feed]](http://article2008.com/images/feed-icon.png "XML Feed For RSS"){kind=icon}
![[Valid RSS feed]](http://article2008.com/images/icon_Rss.png "XML Feed For RSS"){kind=icon}
Category Rss Feed
Print This Article
Add To Favorites