What Is Credit Loss?
Credit loss is rent you don't collect because tenants don't pay—evictions, write-offs, partial payments. Formula: gross rent × credit loss rate. Typically 1–3% of gross in a well-managed property. A $4,000/month property with 2% credit loss loses $80/month. Deduct it from gross (along with vacancy-loss) to get effective-gross-income. Even good properties have some credit loss. Conservative-underwriting uses 1.5–2%.
Credit loss is the rental income lost to tenant non-payment—late payments that become write-offs, eviction losses, and uncollectible amounts. It's a deduction from gross rent to arrive at effective gross income.
At a Glance
- What it is: Rent lost to non-payment, evictions, write-offs
- Why it matters: Reduces effective-gross-income
- Typical rate: 1–3% of gross
- Use it for: Deal-analysis, noi
- Separate from: Vacancy-loss (empty units)
Credit Loss = Gross Rent × Credit Loss Rate
How It Works
The math. Gross rent $48,000/year. Credit loss rate 2%. Credit loss = $960. EGI = gross − vacancy-loss − credit loss = $48,000 − $3,840 − $960 = $43,200.
What drives it. Evictions (lost rent during process, sometimes unrecoverable). Tenants who leave owing. Partial payments that never get made up. Poor tenant-screening increases it. Good screening and management reduce it.
Typical range. 1–3% for stabilized, well-managed properties. Value-add or distressed assets may run 3–5% during turnaround. Class A in strong markets might be under 1%.
Relation to vacancy-loss. Vacancy = empty units. Credit loss = occupied but not paying. Both reduce EGI. Model both.
Real-World Example
Ava in Cleveland. Ava ran a 4-unit for 3 years. Year 1: one eviction, 2 months lost rent ($2,400) + $800 in unrecoverable arrears = $3,200 credit loss on $48,000 gross = 6.7%. She improved tenant-screening. Year 2: $600 credit loss = 1.25%. Year 3: $480 = 1%. She now underwrites at 1.5% for similar properties—conservative but realistic.
Pros & Cons
- Reflects real income
- Prevents overpaying
- Complements vacancy-loss in EGI
- Conservative-underwriting
- Often overlooked by new investors
- Varies with management quality
Watch Out
- Ignoring it: Even 1% matters—on $50K gross, that's $500. Add it to your model.
- Overestimating: 5%+ is high for stabilized; use 1–3% unless you have data
Ask an Investor
The Takeaway
Credit loss is rent lost to non-payment. Use 1.5–2% for conservative-underwriting. Deduct it (with vacancy-loss) from gross to get effective-gross-income.