Randy Langenderfer’s Post

Transcript

Economic vacancy versus, uh, physical occupancy. And so I think everybody probably understands physical occupancy or what we refer to as heads and beds. To get 100 unit and you got 90 units rented, you have a physical occupancy of 90%, right? Pretty straightforward and simple, but economic vacancy is something that is, is really commonly misunderstood I think. And and it starts with the gross rents. Gross rents would be is what would the total rents be if every unit was maximized to the market potential. So if the market was $100, if you're getting $100 then you'd be 100% gross market. But from that gross market, that's where it starts at. You subtract the loss to lease and that's every unit looking at the amount of what the actual rent is compared to that market or gross rent. And that difference becomes your lost. The lease character number should say you're lost the least number. So it starts with gross rents. You subtract out your loss to lease, subtract any concessions you're offering, maybe you're offering one month free or you know something like that. Or free parking something that for their signing up you're subtracting loss to lease concessions, any bad debt that's occurring on any, any evictions and your actual vacancies that 10% to come up to your total example of economic vacancy. And so that is very that is very important. And as an, as your underwriting, it's really important to dig into the rent roll to make sure that what the seller is presenting on the T12 is factual and, and backed up by the rent roll. Especially in smaller properties when you look at those numbers may be very distorted. And so you really want to start and make sure you have good numbers to build your future plan off of. And if you're, if you're taking over a property, if you're going to buy a property, it's easy to say you're going to raise rents. That's every syndicator is going to want to raise rents and lower expenses. And so by doing that, it's, it's safe to assume that some of the tenants are probably not going to stick around. They're not going to like those rent bumps and may move on. So you're, you're not going to have the same economic vacancy as the last. The owner had and so that's very typical in transition to see economic vacancy drop a little. But hopefully you, you hope by year 2 that you have stabilized the market and aren't able to implement your business plan and economic vacancy is the number you you really want to focus on and it's. It's equally as important here to really talk to your property management team as you're looking at that economic vacance numbers, what the what the current seller has as they sit on the T12 versus what your business plan is going to be. And making sure that's very realistic in that your property management company also buys into those numbers or that they provided support to you background for your estimations in those in that underwriting process. Um, they're your biggest business partner to start out with in the transition, so get them on board. Yeah, Randy, I think it's, it's a very common mistake when you're underwriting and it's all, you know, Excel gymnastics, if you will, it's all on paper. To look at year one and say, well, the gross potential rent is $1000, we're going to get $1000. Right, even if you can bring people in at $1000. You're not going to get. Everybody fully transitioned from their current leases out the door and new people in even have time to do renovations. So even if you get a solid business model, it takes time to cycle through an existing tenant base. So you really have to consider the size of the property and how much churn you're expecting, how much retention you want and and how quickly you can get through your renovations. Kind of a rule of thumb I like to use is we'll run comps. We'll look at what what we think we can rent the property for and the goal is to try to get there in two years. Which may sound really conservative, but the way I look at it is I need time. I need time to cycle through the tenants, I need time to get through the renovations. And even if I have. Great estimates going into it and the underwriting. Chances are that something will throw a wrench in there and things will slow down. So. I bake in my economic vacancy, considering that I'm not gonna hit target rents 100% until two years. I think that is very conservative and realistic versus somebody who thinks they're going to do that, like you said, in six months or nine months, just. Most times it's not gonna happen unless it's a really, really hot market.