Vacancy Allowance
Vacancy allowance is the income haircut used for expected downtime, nonpayment, and lease-up friction.
Why it matters
vacancy allowance changes what a disciplined buyer can pay, how much debt the asset can safely carry, and whether the return is coming from operations or fragile assumptions.
Formula
Vacancy allowance = gross potential rent × vacancy assumption.Worked example
In underwriting, tag vacancy allowance beside the exact source input and rerun the model when that input changes. The point is not a pretty metric; it is a better buy, hold, refinance, or walk decision.
How investors read it
Use it to kill bad deals quickly. If the back-of-envelope version does not survive conservative assumptions, do not spend five hours making it look alive.
Common mistakes
- · Treating the metric as a verdict instead of a screen.
- · Using broker-package assumptions without checking the source documents.
- · Ignoring taxes, capex, vacancy, financing terms, and timing.
- · Mixing actual, normalized, and projected numbers without labeling them clearly.
Use current local data and source documents. Realist should show assumptions and date-stamp market inputs because stale inputs create fake precision.