Vacancy is the Scourge of the Biz - Posted by Jimmy
Posted by Jimmy on July 02, 2007 at 05:36:40:
I’ve been landlording for 8 years now. Vacancy is the most frustrating aspect of the biz. I love it when a broker or a seller hands me a proforma showing a 2% V factor. In my experience, a 15% collection factor is more accurate. In other words, at the end of any given year, I will have colected about 85% of the maximum possible rents. That includes vacant units, plus no-pays and slow-pays. a better metric, in my opinion.
with that said, I have had periods of time when I had virtually no vacancy. for about 6 months last year, I had 88/90 units full. but in the middle of 2005, I was down to 65/85. 9 tenants split all at once. it just happens.
and 2003 was a disastrous year for rentals in Tyler, TX. combination of horrors. 500 new apartment units hit market on north side of town (my side). new HUD vouchers disappeared. major layoffs at Trane AC and Kelly Sprngfield factories. worse yet, Tyler Pipe Foundry (an emplorer of thousands) was shut down by the EPA for the whole year. and I had a 4-plex right accross US-69 from that facility. and I lost a number of my best tenants to home ownership, due to historically low interest rates and he plethora of 107% loan deals back then. My V factor was 40%. Here’s the incredbly ironic thing about 2003 in Tyler, TX. The entire resale market jumped 20% in value. So I sold off a number of properties, pocketed some profits, licked my wounds, and moved ahead. So how did I manage to survive 12 months of 40% vacancy? For one, I am not mortgaged up to my eyeballs. and I keep a reserve of cash available for just such contingencies. but it was an unpleasant experience.
I learned some important lessons then. I knew I needed to be more diversified geographically. Now, I have clusters of properties in 6 different towns in ETX, and they do not experience the same things at the same time.
When I have a persistent vacancy, I have my managers pay close attention to the people they show the unit. I want feedback. SOmetimes, I meed to lower the rent. Sometimes, I need to take the unit off the market and spiff it up. Some properties just need to be sold, because the problems are not fixable. Sometimes I lower the deposit, or allow it to be paid in installments. Sometimes the problem is external. A drug house next door is infecting the neighborhood, chasing off all the good tenants and bringing in only bad ones. I stay on good terms with local law enforcement, and report these activities.