Test the assumptions behind a rental before you trust the numbers

Every rental spreadsheet ends in a number, and the number always looks solid. It is not. It is the output of seven or eight guesses stacked on top of each other, and if two of them are optimistic the answer at the bottom is fiction with a dollar sign in front of it. Before you trust a projection, go up the page and interrogate every line that was typed by a human rather than taken from a document.

I have run these projections for my own purchases since 2005. The spreadsheets that hurt me were never wrong at the bottom. They were wrong four rows up, in a cell nobody questioned.

The lines that are guesses

Start by marking which numbers came from a document and which came from a person. The purchase price is a fact once you have an accepted offer. The strata fee today is on the Form B. The property taxes are on a notice. Almost everything else is an assumption.

The rent is an assumption, even when a tenant is in place, because it is really an assumption about the rent you can get on turnover under the Residential Tenancy Act, not the rent being paid now. Vacancy is an assumption. Turnover cost is an assumption, and often an invisible one, because many projections do not have a line for it at all. Repairs and maintenance is an assumption. Future strata fee increases and the possibility of a special levy are assumptions. The rate at renewal is an assumption. Property management, if you have not hired anyone yet, is an assumption. And your own time, which usually appears nowhere, is the assumption that gets left out entirely.

Test each one on its own

Take them one at a time and ask what has to be true.

Rent: what does this exact unit, in this building, in this condition, actually rent for right now? Not the building next door with new appliances. Ask what happens to your number if the unit rents for less than you wrote and takes longer to fill.

Vacancy: a projection usually models vacancy as a smooth annual reduction. Reality is a unit sitting empty for a stretch of weeks between tenants, all at once, in a month when you also paid to paint it. Model it as an event, not as a shave off the top.

Turnover: every tenant change costs cleaning, paint, small repairs, advertising and your time, and the cost lands in one lump. Then ask how often you expect turnover, and be honest that a unit that attracts short-stay tenants turns over more.

Repairs: an older building costs more than a new one, and the costs are not evenly spaced. Roofs, hot water tanks and appliances do not fail on a schedule that matches your projection.

Strata fees and levies: read the depreciation report and the contingency reserve fund balance, and read the minutes. A building with major work coming and a thin reserve is telling you what your fees are going to do. That is the closest you get to a fact about the future.

The rate at renewal: your mortgage renews, and the projection has to survive a rate you did not choose. Run it at a rate meaningfully higher than today's. If it fails, that is the answer.

Your own time: put a value on the hours. If the property only works because you do the work for free, then you have bought a job, and you should decide whether you want it.

The one that fails most often

In my experience the line that breaks a projection is not rent. Buyers are usually careful about rent because they know it is the headline. The line that breaks it is repairs and turnover, because those get modelled as a small smooth annual figure and arrive as a large lump, often in the same year, often when the unit is also empty.

The second most common failure is a special levy in a building the buyer never studied. That one is avoidable. The documents were available during the subject period and nobody read them properly.

How I stress-test a deal

I build the projection twice. Once with what I expect. Once with a bad but entirely plausible year: the rent comes in lower, the unit sits empty for a stretch, the tenant turns over, a real repair happens, and the mortgage renews higher. Not a catastrophe, just an ordinary bad year with everything landing at once. Ordinary bad years happen, and they cluster.

If the deal survives the second version, I look at the first version and get on with it. If it only works in the first version, I do not buy it, no matter how good the optimistic number looks. That rule has cost me a few properties I liked. It has never cost me one I would still want today.

One more thing, and I mean it as a single pointer rather than a hedge: get the tax treatment and the ownership structure reviewed by an accountant before you write the offer. Depreciation, deductibility and what happens on a sale change the real return, and they are not what a spreadsheet you built yourself is good at. Get that part right once, at the start.

Thinking about buying or selling in the Fraser Valley? Message me and we will go through your options.