Vacancy and Credit Loss

Formula & Definition

Vacancy and Credit Loss: Real Estate Analysis

Vacancy and credit loss is the potential rental income that is lost due to space that lies unoccupied or due to nonpayment of rent by tenants.

You'll use vacancy and credit loss to reduce the gross scheduled income (i.e., the property's total potential income) to give you the gross operating income (GOI), which is the amount of revenue you actually expect to collect.

This term is also called vacancy and credit allowance, reflecting its use as an estimate of future losses that may occur due to turnover and uncollectable rent.

A number of real-world factors can vacancy and credit loss. If the rents that you charge are less than chat tenants must pay for comparable properties, then it's reasonable to assume that no one will ever leave to get a better deal elsewhere. If a particular location experiences a very high demand, vacancies may disappear until developers respond to that demand by building more space. If they build too much space, vacancy can swing in the opposite direction, as supply then exceeds demand. Difficult economic timers can affect both vacancy and credit issues. Businesses may be reluctant to expand, thus reducing the absorption of available space. Tenants may run into cash flow difficulties and choose to pay their suppliers before they pay their landlords.

How to Calculate Vacancy and Credit Loss

  1. Determine gross scheduled income (see separate article here).
  2. Estimate vacancy and credit loss rate as a percentage
  3. Multiply the two values: Vacancy and Credit Loss calculation

Excel Spreadsheet Example

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