Ideally, property managers would be able to screen potential tenants perfectly so that a property would never be forced to evict tenants for nonpayment of rent. In reality, property managers face a much more uncertain world with tenants, and may not be able to count on receiving rent each month as scheduled. When tenants fail to pay rent, property owners must understand how much that failure to collect rent cuts into their bottom line, either on a case-by-case basis or as an overall analysis coupled with vacancy rates for the property.
Single Unit Calculation
Determine a tenant’s rent per rent cycle, which is often paid on a monthly basis. For example, a tenant who pays $500 biweekly has a monthly rent of $1,000.
Determine the total amount of time the unit didn’t generate rental income that was expected in terms of rent cycles. For example, if a tenant failed to pay rent, and it took 45 days to evict him, another 15 days to prepare the unit to be rented again, then 30 days to fill the vacancy, the unit was vacant for a total of 90 days, or three months, in which rent wasn’t collected.
Multiply the number of months the unit was vacant when expected to be filled by the monthly rent the property manager expected to receive over the same period. In the above example, property managers expected to collect $1,000 each month, for three months, resulting in a total rent collection loss of $3,000.
Determine the occupancy rate for each type of unit – one bedroom, two bedroom, studio – in the property. While this rate may be the current rate, a yearly average will provide the most accurate projection.
Total each month’s gross rent receipts for the prior year and divide by 12 to determine the property’s average gross rental income.
Multiply the monthly rent for each type of unit by the total number of that type of units in the property, and repeat for each type of unit available. Total these figures to determine the property’s potential gross income.
Subtract the actual monthly rent income from the property’s average gross income rate. Divide this figure by the gross income rate. This figure, represented as a percentage, is the vacancy and rent collection loss expected for the property for the year.
Property analysis only yields information based upon current market rents. If a property has a high percentage of units for which tenants don't pay market rates -- those in rent-protected units, or those in old leases -- the actual gross rental income figure may need to be adjusted to fit market rates to make appraisals accurate.