How do Property owners / Landlords calculate the cost of holding inventory?
I am looking to estimate the cost vacancy, determine when to offer concession / discounts and how much? Does anyone have a rule / formula they use for this calculations? Thanks.
[{"id": "fy1ndom", "text": "Factor in a 5% vacancy rate on your NOI", "replies": [{"id": "fy1o3fl", "text": "What market?", "replies": [{"id": "fy1ojcl", "text": "It\u2019s up to you to do your due diligence sir! Socal is currently 3% and it raised to 4 1/2% with COVID", "replies": [{"id": "fy1p0m5", "text": "Right. It varies by market, so was wondering what market you're referring to.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "fy20ras", "text": "It's a good question.   In general I would try to balance:\n\n1. Cash reserves\n2. CAP based valuation\n\nIt doesn't make sense to hold the asset vacant beyond your ability to carry the costs, so the vacancy period should max out at 70% of # months carrying capacity.\n\nAt the same time, every 5% drop in rent could reduce the appraisal value 5%, subsequently reducing your equity by that or more, depending on the LTV, so that would want to be avoided.\n\nIf the price is at market you shouldn't need to discount.  But if you have to, the discounts should be offered in phases.\nSo I imagine a plan like this would have value:\n\nPhase 1 -\nAsk full rents for first 50% of carrying capacity\n\nPhase 2 - \nReduce rent 5% for two more 10% carrying periods\n\nPhase 3 - \nAt 70% of the carrying capacity, implement rapid rental phase, offer whatever it takes. \n\nAre you leasing the space as the owner?  What does your broker say?  Some concessions are better for you than others.  A local expert would be invaluable.", "replies": [], "depth": 1}, {"id": "fy2ci62", "text": "It depends on what return metrics you use and what your hold period.  Cash on cash, IRR, multiple, etc.  Some times it makes sense to give free rent, sometimes lower the rate, refurbish, etc.", "replies": [], "depth": 1}]