16
August
2018

Your Investment Glossary: Look-Back Period

Your Investment Glossary: Look-Back Period

When new investors first start looking into turnkey, it can be easy to get overwhelmed by the massive amount of information floating around. It may seem like everyone else already knows the answer to all your questions, which might understandably discourage you from asking those questions in the first place. At Spartan Invest, we encourage an active and question-filled dialogue with all our clients to ensure that each person is fully educated about all the details of their investment. We think it is of the utmost importance that investors of every experience level feel comfortable asking detailed questions of their turnkey provider and seeking clarification whenever and wherever it is needed.

 

A Crucial Question

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Often, performance metrics are thrown around very casually, with no reference to what went into the calculation or where the data came from. The assumption seems to be that everyone is on the same page - but that can be a very dangerous assumption to make.

 

When it comes to post hoc data analysis, one of the most important things to clarify is the look-back period for which the calculation is being done. Any metric for a rental property investment can change over time, so you need to know if a provider is giving you numbers for this quarter, the past year or just today. One of the most common places this crucial distinction pops up is when providers talk about their occupancy rates - and an unethical provider can easily mislead a new investor who doesn’t know to ask the right follow-up questions.

 

**If you need a brush-up on what the occupancy rate entails and how to calculate it, check out {this recent post} from our Rental Investment Glossary series.**

 

Don’t Be Mislead: Clarify the Look-Back Period

When you are vetting turnkey providers, one of the first questions you should be asking is “What is your occupancy rate?” The answer to this question, and the speed and detail with which it is given, will tell you a lot about the provider. For example, as of July 29, 2016, Spartan’s 52-week occupancy rate is a stellar 97.2%.

 

Often, you won’t get such a precise figure. More likely, you’ll hear vague answers like “Oh, it’s high. Like 99-100%”. Of course, this may be accurate - however unlikely - and we like to give folks the benefit of the doubt. However, it is important to follow up by asking what the look-back period for that figure is. Why? Because a 100% occupancy rate for the past 52 weeks means that all the properties in the provider’s portfolio have had a single tenant for an entire year, but if the calculation period is only the past 13 weeks, or just for the current day, it’s a whole different story.

 

Let’s say a new investor is asking a potential provider about the occupancy rate for their portfolio on December 31st. Assume that, during the past year, a number of the provider’s properties experienced tenancy issues that caused vacancy. If those issues occurred any time before October, then a 13-week occupancy rate calculated on December 31st would not include the vacancy. In that case, a less than scrupulous - or perhaps just lazy - provider could say that they have a 100% occupancy rate. Without a follow-up about the calculation period, a potential client would have no idea that some properties lost annual return to unexpected vacancy a few months earlier.

 

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And here’s the catch: in this scenario, the provider is not actually lying, per se. Truthfully, most providers have 100% occupancy for at least a few days of the year, but does a one-day or one-week look-back period really constitute a fair representation of a portfolio’s overall performance? And, if there was vacancy in the past year, is it ethical to provide a shorter-term figure without specifying the look-back period and offering longer-term data upfront? Any provider that tries to walk this line between ‘accidentally’ misleading and outright lying is not worth your time. Luckily, a few quick, simple clarification questions can help separate the wheat from the chaff pretty swiftly.

 

Of course, it is not uncommon for a good property or a good provider to run into tenancy issues once in awhile. But if longer-term numbers are withheld, it is possible that there is a more systemic issue with tenant selection or property maintenance that could spell trouble for you as an investor down the road. If a provider truly values their clients’ trust, providing updated short-, mid-, and long-term rates should be par for the course.

 

Keeping It Current

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It’s important for any provider to know their current occupancy rates and other metrics off-hand. In fact, we think any provider that isn’t strongly metric-driven isn’t pulling their weight. But a truly dedicated provider should not just check-in on their performance metrics when a potential client inquires about them, they should be obsessed with them. At Spartan, we believe performance evaluation and analysis should happen every day and be the No. 1 driver of everything we do - from property selection to tenant screening, from rehab to marketing strategy.

 

At Spartan, we like to keep things as up-to-date as possible. We update our occupancy rate and other metrics constantly by calculating the rate daily and then finding the average for both 52-week and 13-week look-back periods. On days when all our properties are occupied, we have 100% occupancy. On days when one or more is vacant due to tenant turnover, the rate goes down. Averaging daily numbers gives us a rolling-period figure that reflects daily changes, meaning we can provide our clients with the most current figures for our entire portfolio at a moment’s notice.

 

Beyond Occupancy

Though we’ve focused on the necessity of clarifying look-back periods in occupancy rate calculations, the same lesson applies to any other performance metric. {Maintenance rates} can easily be misleading if a large repair, new roof, or HVAC replacement is left out of a quoted rate by simply truncating the look-back period. Again, a 13-week figure quoted in December won’t include a massive expense that occurred in July. The average move-out cost for a portfolio is easily dressed-up if a provider uses a look-back period that conveniently excludes the expenses incurred after a messy eviction.

 

No matter what metric you’re discussing, take the time to clarify the look-back period to ensure you’re getting the accurate data you need. If a provider quotes a 13-week rate, ask for the 52-week or even five-year rate. If they can’t or won’t give it to you, suddenly become hard to get ahold of, or simply try to redirect the conversation, you’ll know it’s time to move on.

 

Get Straight Answers From Spartan 

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If you’dlike to know more about Spartan Invest, our performance metrics, or why we’re the best in the business, feel free to contact us {here} and someone will get in touch with you right away to answer any questions you might have. We’re committed to building long-term relationships built on trust and transparency, and that means opening up an honest, comfortable dialogue at the very start. Drop us a line, and let’s have a conversation.

http://www.spartaninvest.com/blog/rental-investment-glossary-vacancy-occupancy-rates/

http://www.spartaninvest.com/blog/rental-investment-glossary-maintenance-rates/

http://www.spartaninvest.com/contact-us/

 

 

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Lindsay Davis
Chief Executive Officer

Categories: Blog

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info@spartaninvest.com