Many landlords don’t know, or are not willing to admit, that they don’t know their average costs for vacancy, repairs and administration (management).
Why is this important?
Because cash flow is the most important driving force for almost all landlords and you can’t estimate your cash flow if you don’t know your “VRA” costs.
In addition, if you don’t know your estimated cash flow before buying a rental property, you can’t estimate your cash-on-cash return which for most landlords is a crucial metric since it reflects how efficient you are in leveraging your finite resources. Cash flow and cash-on-cash return are the most fundamental parameters for measuring performance of rentals.
There are four approaches to incorporating vacancy, repairs and administration (VRA) into your cash flow calculations. I use the fourth approach below.
1. Ignore
This approach of simply ignoring altogether the cost of VRA is the easiest to calculate since putting one's head in the sand requires no effort and no calculations whatsoever.
I don't have hard data, but I'm guessing that at least 1/4 to 1/3 of landlords simply ignore VRA when they are estimating their cash flow when evaluating single family homes for purchase as rentals, before the lender forces them to think about it. I doubt if any investor who buys multi's ignore VRA.
2. Pulling a VRA Number Out of Thin Air
Pulling a VRA number out of thin air is the second easiest approach. In Anthony Chara's course on apartment investing, he strongly recommended that if you don't know the historical average for a specific apartment complex for vacancy for example, use a minimum of 5%. That does not include maintenance, management and other costs.
3. Using VRA Numbers Provided by Broker-Property Managers Who Specialize in Rentals
There are commercial real estate brokers who specialize in rentals and they have the most recent hard data for the aggregate VRA numbers for properties in your class, in your location within a specified period of time in recent history. If you know such a broker-property manager, you can graciously ask if they will share that number.