How do you account for vacancies on your property?

1 What is vacancy rate?

Vacancy rate is the percentage of your rental units that are unoccupied or not generating income at a given time. It is calculated by dividing the number of vacant units by the total number of units on your property. For example, if you have 10 units and 2 of them are vacant, your vacancy rate is 20%. Vacancy rate is an important indicator of your property's performance and demand. It also affects your gross potential rent, which is the maximum amount of rent you could collect if all your units were occupied and paid at market rates.

2 How do you record vacancies?

Vacancies are recorded as a loss of income on your income statement. They are part of your operating expenses, along with other costs such as maintenance, utilities, taxes, and insurance. Vacancies reduce your net operating income, which is the difference between your gross potential rent and your operating expenses. Net operating income is a key measure of your property's profitability and value. To record vacancies, you need to track the occupancy status of each unit, the rent amount, and the duration of the vacancy. You can use a software program, a spreadsheet, or a ledger to keep track of these details.

3 How do you reduce vacancies?

Vacancies can be reduced by implementing strategies to attract and retain tenants. Market research should be conducted to set competitive and realistic rent prices, and incentives or discounts can be offered for referrals, renewals, or long-term leases. Additionally, marketing your property through online platforms, social media, and signage is important. Screening and selecting qualified and reliable tenants is essential, as well as providing excellent customer service and communication. Maintaining and improving the property's condition and amenities, responding promptly to tenant requests and complaints, enforcing the lease terms and policies, and collecting rent on time are also important. Following up on late payments is also crucial.

4 How do you budget for vacancies?

Vacancies are unpredictable, but you can budget for them by estimating your vacancy rate and setting aside a reserve fund. To estimate your vacancy rate, you can use historical data, industry benchmarks, or market trends. For example, if your average vacancy rate in the past year was 10%, you can use that as a baseline for your budget. However, you should also consider factors such as seasonality, economic conditions, and competition that may affect your vacancy rate in the future. To set aside a reserve fund, you can multiply your estimated vacancy rate by your gross potential rent. For example, if your gross potential rent is $10,000 and your estimated vacancy rate is 10%, you should have a reserve fund of $1,000 to cover your vacancies.

5 How do you report vacancies?

Vacancies are reported as part of your property management accounting reports. These reports include your income statement, your balance sheet, and your cash flow statement. Your income statement shows your revenues and expenses, including your vacancies, for a specific period. Your balance sheet shows your assets and liabilities, including your reserve fund, at a specific date. Your cash flow statement shows your inflows and outflows of cash, including your vacancies, for a specific period. These reports help you monitor your property's financial performance and health. They also help you communicate with your owners, investors, lenders, and tax authorities.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?