Definition§
Vacancy and Collection Allowance is an estimated amount that needs to be deducted from the Potential Gross Income (PGI) when preparing a real estate budget. This allowance accounts for losses from units that remain unoccupied (vacancy) and rent that goes uncollected (collection loss). The budgeted vacancy rate may reflect the rate currently experienced or forecasted for the market for the upcoming year. It may also vary based on factors like tenant loyalty, rent concessions, and management quality.
Examples§
-
College Town: In a college town, the expected apartment vacancy and collection allowance was an average of 5% during the 9-month regular college term and 25% during the summer session, resulting in an overall 10% rate for the year.
-
Urban Area: A high-rise residential building in a densely populated urban area may budget a 3% vacancy and collection allowance due to high demand and strong tenant loyalty.
-
Suburban Development: A new suburban development without established tenant loyalty might project a 15% vacancy and collection allowance in its initial years of operation.
Frequently Asked Questions§
What is Potential Gross Income (PGI)?§
Potential Gross Income (PGI) is the total rental revenue that a property could generate if it were fully occupied and all rents were collected without any losses from vacancies or defaults.
How is the Vacancy and Collection Allowance calculated?§
The allowance is calculated by estimating the percentage of total potential rental income that is expected to be lost due to vacancies and non-collection of rent.
Should the allowance be higher for new properties?§
Yes, new properties, especially those in untested markets or without established tenants, might budget higher allowances until occupancy stabilizes and tenant reliability is proven.
How frequently should Vacancy and Collection Allowance be reviewed?§
It should be reviewed annually or more frequently if there are significant changes in market conditions, property management, or tenant demographics.
What factors influence the rate of allowance?§
Factors include tenant turnover rates, economic conditions, rent levels, property location, property management efficiency, and market demand.
Related Terms§
Potential Gross Income (PGI)§
The total rental income a property could produce if fully occupied without any deductions for vacancies or non-payment of rent.
Effective Gross Income (EGI)§
The actual income collected after deducting vacancy and collection losses from Potential Gross Income.
Occupancy Rate§
A measure of the portion of available rental units that are occupied over a specific period.
Tenant Turnover§
The rate at which tenants vacate and are replaced by new tenants in a rental property.
Rent Concessions§
Incentives offered by landlords to attract or retain tenants, which may impact the effective rental income reported.
Online Resources§
- Investopedia: Vacancy Rate Definition
- U.S. Census Bureau: Residential Vacancies and Homeownership Data
- National Multifamily Housing Council: Market Trends
References§
- Geltner, D., Miller, N.G., Clayton, J., & Eichholtz, P. (2013). “Commercial Real Estate Analysis and Investments.” Cengage Learning.
- Brueggeman, W.B. & Fisher, J.D. (2011). “Real Estate Finance and Investments.” McGraw-Hill Higher Education.
Suggested Books for Further Studies§
- Fisher, L.M., & Martin, R. (2020). “Real Estate Investment and Finance.” Routledge.
- Ling, D.C. & Archer, W.R. (2021). “Real Estate Principles: A Value Approach.” McGraw-Hill Education.
- Graaskamp, J.A. (2010). “A Guide to Real Estate Investment Analysis.” Urban Land Institute.
