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
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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.
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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.
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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.
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.
Real Estate Basics: Vacancy and Collection Allowance Fundamentals Quiz
### What is Potential Gross Income (PGI)?
- [x] The total rental revenue that a property could generate if it were fully occupied.
- [ ] The actual income collected after expenses.
- [ ] The budgeted net income from a property.
- [ ] The initial investment cost of the property.
> **Explanation:** Potential Gross Income (PGI) is the total rental revenue a property could generate if it were fully occupied and all rents were collected without any losses.
### What does the Vacancy and Collection Allowance account for?
- [ ] Property maintenance costs
- [ ] Marketing expenses
- [x] Losses from unoccupied units and uncollected rent
- [ ] Property taxes
> **Explanation:** The Vacancy and Collection Allowance accounts for the loss of income from units that remain unoccupied (vacancy) and rent that goes uncollected (collection loss).
### What could influence a higher Vacancy and Collection Allowance in a budget?
- [x] Lack of tenant loyalty
- [ ] High occupancy rates
- [ ] Strong marketing strategies
- [ ] Lower rent prices
> **Explanation:** A lack of tenant loyalty can contribute to higher turnover rates and longer vacancy periods, leading to a higher Vacancy and Collection Allowance.
### In what type of area might you budget a lower Vacancy and Collection Allowance?
- [ ] Rural areas
- [x] Densely populated urban areas
- [ ] Developing suburbs
- [ ] College towns
> **Explanation:** Densely populated urban areas often have higher demand for rentals and tenant loyalty, resulting in lower vacancy rates and collection losses.
### How often should Vacancy and Collection Allowance be reviewed?
- [ ] Every five years
- [ ] Only when there is a new tenant
- [x] Annually or when market conditions change significantly
- [ ] Every fiscal quarter
> **Explanation:** Vacancy and Collection Allowance should be reviewed annually or more frequently if significant changes occur in market conditions, management, or tenant demographics.
### What is Effective Gross Income (EGI)?
- [x] The actual income collected after deducting vacancy and collection losses from PGI
- [ ] The total revenue before any deductions
- [ ] The annual rental income of a property
- [ ] The property's market value
> **Explanation:** Effective Gross Income (EGI) is the actual income collected after subtracting vacancy and collection losses from Potential Gross Income (PGI).
### Which term describes incentives offered by landlords to attract tenants?
- [ ] Effective Gross Income
- [ ] Vacancy Rate
- [x] Rent Concessions
- [ ] Tenant Turnover
> **Explanation:** Rent concessions are incentives offered by landlords to attract or retain tenants, which can impact the effective rental income reported.
### How might market demand affect Vacancy and Collection Allowance?
- [x] Higher demand can lead to lower vacancy and collection allowances.
- [ ] Higher demand will increase the allowance needed.
- [ ] It has no effect on the allowance.
- [ ] Lower demand reduces the allowance.
> **Explanation:** Higher market demand typically reduces the vacancy rate and improves rent collection, leading to lower Vacancy and Collection Allowance.
### What does the term 'Occupancy Rate' refer to?
- [ ] The percentage of rent collected on time
- [ ] The total revenue from rents
- [ ] The proportion of units occupied over a period
- [x] The leased area as a percentage of the total leasable area
> **Explanation:** Occupancy Rate measures the proportion of available rental units or area that is occupied over a specific period.
### Why might a new property have a higher Vacancy and Collection Allowance?
- [ ] To account for increasing property value
- [x] Due to untested market conditions and until tenant occupancy stabilizes
- [ ] For budgeting future renovations
- [ ] Improved property management expectations
> **Explanation:** New properties often budget a higher Vacancy and Collection Allowance due to untested market conditions and the lack of established tenants, leading to initial uncertainties in occupancy and rent collection.
