Vacancy and Expense Assumptions

Rental returns are decided by the assumptions under the numbers, not the headline rent. Every pro forma hides an opinion about vacancy, maintenance, management, capex reserves, and the routine costs of turnover. The investor who builds the assumptions honestly — leaning on the established averages rather than what they hope the property will do — finds fewer surprises in the first years of ownership, because the cash the model reserved from day one is the cash that absorbs the inevitable cost shocks. Optimism in the assumptions is the single most expensive error in real estate underwriting.

Vacancy: the 5-10% rule

Vacancy assumes a unit is not collecting rent for some portion of the year — through turnover between tenants, occasional mid-lease gaps, or non-payment risk. The rule of thumb is 5% in stable markets with long tenancies and good screening, higher (8-10%) in transient markets, with shorter leases, or where demand fluctuates. A 5% vacancy on a $1,800 rental is $1,080 of income the model never assumes it receives — conservative by intent, because the year you do not reserve for it is the year the tenant breaks a lease mid-summer.

Repairs versus capex reserve

Two expense categories are easy to confuse but behave differently. Repairs and maintenance are the recurring weekly to annual costs — a leaking faucet, a stove element, a gutter clean — typically 5-15% of rent depending on property age. The capex reserve is the utterly separate fund for the big systems: roof, hvac, water heater, major plumbing. Most investors underfund it because the costs are infrequent, but every property hits one every few years. Size the reserve at $200-500 a unit annually, accumulate it in a separate account, and a $5,000 hvac replacement does not become a property-financing crisis.

The 50% rule as a backstop

The 50% rule — expenses and vacancy consume about half of gross rent over the long run — is the external check on whether your line-item assumptions are reasonable. If your detailed underwrite shows expenses at 35% of gross rent, the 50% rule is warning you the assumptions are optimistic. New builds legitimately run lower than 50%; older properties run higher. The combination of a line-item underwrite and a 50% sanity check is what catches both the naive optimism of a too-thin expense list and the sloppy averaging of a one-number model.

Turnover is the silent cost

Turnover absorbs both the vacancy gap and the make-ready cost: paint, carpet, deep clean, minor repairs, and the marketing and screening for the next tenant. A single turnover on a single-family rental often costs twice the month of lost rent — $3,000 to $4,000 once you add the make-ready. Good tenant screening and retention reduce turnover frequency, and every year of extra tenancy is real return — a tenant who stays five years avoids four turnovers worth of cost and vacancy, which compounds into a measurable yield advantage over even a slightly higher-paying but shorter tenant.

Build the assumptions to withstand a bad year

The test of a pro forma is not whether it survives a good year but whether the cash flow survives a bad one — a turnover in the same year as a roof, a tenant eviction, or an unexpected assessment. The reserve assumptions that let the property absorb those events without extracting new capital from the investor are what separate a sustainable rental from a fragile one. Underwrite to the bad year and the good years pay you; underwrite to the good year and the bad year bankrupts the model on the property you cannot easily sell.