What is the real cost to the landlord of a poorly marketed (and therefore poorly managed) investment property?

In this section we will use Net Present Value calculation for rents NOT collected in the future due to vacancies, and derive from this loss of revenue the subsequent effect on the value of a property. Let's consider an apartment building with 100 rental units with rents averaging $1,000/month. Let's further consider a risk-free interest rate of 5%.

Just do the math:

Let's consider the following scenarios: 10% vacancy rate, 5% vacancy rate, 2% vacancy rate. (please see the Net Present Value of Vacancy Losses table below.)
A. Your management company collects the management fee, but does not earn the fee: 10% vacancy loss.
B. Your management company collects the management fee, and maintains a 5% vacancy loss.

C. You made some heads roll at your management company, (or hired us), and attained a mere 2% vacancy loss.

At 2% vacancy rate, over the period of 120 months(10 years) and interest rate of 5%, compounded at the beginning of the month (because the rents are du e on the first) the Present value of the loss is $189,348.38

At 5% vacancy rate, over the period of 120 months(10 years) and interest rate of 5%, compounded at the beginning of the month (because the rents are du e on the first) the Present value of the loss is $473,370.95

You can probably already guess that with the vacancy rate at 10% the NPV of the loss will be close to a million dollars.

At 10% vacancy rate, over the period of 120 months(10 years) and interest rate of 5%, compounded at the beginning of the month (because the rents are due on the first of each month) the present value of the discounted future losses is $946,741.89. This number makes sense because the loss of a dollar 10 years from now is not as significant as a loss of a dollar today.

$473,370.95(loss at 5% vacancy) - $189,348.38(loss at 2% vacancy) = $284,022.57 (gross improvement not counting costs of signs, banners, flags, balloons, marketing and advertisement fees, and miscellaneous fees and expenses, over the period of 10 years, expressed in today's dollars, this is a remarkable improvement!)

$946,741.89(loss at 10% vacancy) - $189,348.38(loss at 2% vacancy) = $757,393.51 (gross improvement not counting costs of signs, banners, flags, balloons, marketing and advertisement fees, and miscellaneous fees and expenses, over the period of 10 years, expressed in today's dollars, this is a remarkable improvement!)

An appraiser using Income Approach to Value who uses the same assumptions that we used, and concerned with just the next 10 years will value the same building with three different vacancy rates at vastly different valuations.

Over the period of 10 years, the difference is so significant, it vastly affects the value of the property! By reducing the vacancy rate from 5% to 2% today's value of the building in today's dollars goes up by $284,022.57! By reducing the vacancy rate from 10% to 2% today's value of the building in today's dollars goes up by $757,393.51! As the owner, you owe it to yourself to take control of the future cash-flows as well as your property's vacancy rate!

Therefore, depending on the current vacancy rate, our services have a real value to the owner of $284,022.57 and $757,393.51.