Bonus Operations is a series hosted by apartment owner/operator and Best Ever Show host, Slocomb Reed. In each five- to ten-minute episode, Slocomb provides his top takes for executing your business plan and maintaining cash flow.
In this episode, Slocomb introduces the “200 Unit Months of Operation” concept to predict when a rental property portfolio stabilizes. It emphasizes long-term planning, particularly for small landlords, and discusses the influence of vacancy rates on net operating income.
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TRANSCRIPTION
Slocomb Reed: Best Ever listeners, welcome to a bonus operations episode. I'm Slocomb Reed and in these bonus episodes I give you my top tips for executing on your business plans and maintaining cash flow. Today we're going to be talking about how to understand stability in small rental portfolios, or really more understanding stability in rental portfolios with small unit counts.
Portfolios like this, your single family rental, or a handful, or a four family, or single tenant commercial spaces - they've seen wild short-term swings in NOI due to vacancy and repairs, because each unit accounts for a large percentage of the overall revenue and expenses. It's easy, especially on an emotional level, to be short-sighted about the profitability of a portfolio with a small unit count, because you often maintain 100% occupancy for a long time, and it feels like the skies are going to be clear and cloudy forever... And then you hit a period with a couple of vacancies and you feel like you're hemorrhaging cash. So the question I want to answer with this episode is "How long does it take us as landlords to feel the ebbs and flows of rental real estate, and to know what it means for our portfolio to be operating in a stable manner?"
Here's my proposal - you experienced stability over 200 unit-months of operation. What I mean by that is divide 200 by the number of units in your portfolio or your property, and you have the number of months over which you can reasonably expect to experience stability.
I believe 200 is a small number as it takes to recognize a stability. I think 100 is way too few, and I think these examples that I'm about to give you will help explain that. We're going to work with four examples here in this short-form podcast episode. We'll talk about one unit, or a single family rental, or a single tenant commercial space. We're going to talk about a fourplex, or four units, we'll talk about a 20 unit portfolio property, and then a 100 unit portfolio or property.
So how long does it take these portfolios to experience stability? If you only have one unit, 200 months divided by one unit is 200 months. That's 16 years and eight months. It's going to take you over 16 years to experience stability in a one unit portfolio. With a four unit property or portfolio, 200 divided by four is 50 months, meaning it takes four years and two months to experience the same stability it takes a single family over 16 years to experience.
A 20 unit - 200 divided by 20 is 10 months, so you experienced stability in under a year. And if you have a 100 unit property or portfolio, it takes you only two months to experience operational stability. I hope this already resonates with you. I want to give you an example of why I think this metric works. I want to talk about vacancy specifically. So if we go with 95% occupancy, meaning 5% vacancy, over time, as a target or as a metric that we're underwriting with, or hoping for in our operations, that means over 200 unit months; there will be 10 unit months of vacancy. If you only have an individual unit, that's almost a full year of vacancy; that's 10 individual months where your occupancy is zero. Chances are, it happens multiple months at a time, and you have 100% occupancy in your one unit lasting multiple years in between vacancies. Again, clear skies, everything's great, and then all of a sudden, after a few years, you have expenses - getting that property repaired, renovated, the time it takes to get it leased... And that's why I think it takes over 16 years to really experience stability with an individual unit.
With a four unit, over four years, you'll have a vacant unit about every five months. That's 50 months divided by the 10 months; one unit every five months. There's two or three vacancies per year. Now, of course, that's not the way that it actually happens. Sometimes you're going to have two vacancies; you may even have more. Now, again, I'm talking about after, let's say a distressed property has been brought to stability, and you've gotten it leased up. I'm not talking about the empty building you just bought. The time it takes to get that stabilized - not considered in this equation. But a four unit property is going to have two or three vacancies per year on average, and it's going to take you at least four years to experience that stability of just having the two or three vacancies per year.
Break: [00:06:55.17]
Slocomb Reed: In a 20-unit, 5% vacancy, 95% occupancy means you have one vacancy at all times. Now, of course, that's not the way it works; you do have months, in my experience, with 100% occupancy, and then there are months that two or three people move out at the same time. However, over the course of a year, you should experience that you had about 10 months' worth of vacancy.
And with a 100 unit property or portfolio, with 95% occupancy, of course, the expectation is that five units will be vacant per month at all times. Of course, that's not exactly how it pans out, but only having a couple of vacancies is actually a really good thing, and it should balance out the times that your vacancy goes above five units.
So I hope this concept of 200 unit-months to experience operational stability makes sense to you. I hope I'm adding value to you with this concept. And if you have a small unit count in your portfolio, or you have properties with small unit counts, I hope this helps you understand how to see this stability in the volatility of your day-to-day operations. All those times where it feels like everything is going right because you're 100% occupied, and those times when half or all of your units are empty, and you're dumping cash into them to get them renovated to get back to that multiple years of 100% occupancy.
Investing with a small unit count really requires long-term thinking, because if you have one unit, I believe it's gonna take you 16 years to experience real stability, and have the 95% occupancy and have your maintenance, repairs, CapEx expenses actually meet what you put in your spreadsheet. That long-term thinking is going to be critical. It also requires having personal finances that don't rely on consistent cash flow from your real estate, because of the volatility that you're going to experience. And frankly, talking through this concept is helping me understand why so many investors are attracted to much larger portfolios, and want nothing to do with a four-unit property. Because if you buy a 100-unit property, you're experiencing stability every two months, six times a year, and your cashflow really should be a lot more consistent than it will be with a four unit.
That said, of course, if you own a single family rental, or a few single family rentals, or fourplexes, you're likely a long-term hold investor anyways, and frankly, you're going to be excited about the appreciation and debt pay down that you experience over the next 4 to 16 years.
So again, I hope this adds value to all of you. I hope it helps those of you with small unit counts in your portfolio or in your properties understand how long it's going to take to experience the stability that you underwrote for, those numbers you put in your spreadsheet for vacancy, repairs, the projected NOI... If you have a small unit count in your property, it's just simply going to take longer to experience that NOI that you projected, assuming that your projections are correct.
Thank you again for listening in, Best Ever listeners. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review. Share this episode with a friend you think I can add value to, someone who has a small unit count portfolio or property in their portfolio. Feel free to find me on LinkedIn, so that we can continue this conversation together; you can give me your thoughts - is 200 too high? Is it too low? Thank you again, and have a Best Ever day.
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