Bad Debt

Bad debt is money owed to a business that it does not expect to collect. For landlords, bad debt is unpaid rent from a tenant who leaves or cannot pay. It shows up in NOI as credit loss, usually combined with vacancy into a single allowance.

The default calculator uses a 5% vacancy and credit loss allowance, $2,400 a year, which covers roughly a month of empty unit or unpaid rent together. A tenant who stops paying for three months and then leaves after an eviction costs far more than that single allowance.

Because NOI is capitalized, collection problems cost more than their face value. One lost month of $4,000 rent is worth about $61,500 of value at a 6.5% cap rate. Screening tenants and collecting a security deposit are the main defenses.