33 Guidelines for investing in real estate.....

Guideline #13:   Budget for vacancy/credit loss

We often see investment property owners prepare pro-formas on their property without a line item for vacancies or credit losses.  "My property is never vacant," they say.  Right.  If you have a long term lease with a "credit" tenant, that might be true for a while, but for the overwhelming number of investment properties, rent loss is a fact of life.  Few are the tenants that you can count on renting from you forever.  And, just because a tenant occupies your space, it doesn't necessarily mean you will collect all the rent due you.

In the old normal times (whenever those were), we normally used a vacancy/credit loss factor of 3% to 5%.  In these new normal times, a range between 5% and 10% should be considered.  Markets do vary considerably.  Your market may have an extremely low vacancy rate today.  What that most likely means is that in the not-to-distant future developers will be doing what developers do, adding more units to the market place.  Those newer units will tend to bring the market back into balance, i. e. vacancy rates in the 5% range.

Do yourself a favor, budget for vacancies and credit losses.  You'll be glad you did.