What distinguishes vacancy losses from credit losses in a cash flow model?

• A. Vacancy losses relate to nonpayment, while credit losses relate to unoccupied units
• B. Vacancy losses arise from unoccupied units; credit losses arise from nonpayment by tenants
• C. Both are the same and can be used interchangeably
• D. Neither affects EGI

Answer: (B)

In a cash flow model, you start with potential gross income assuming every unit is rented and every tenant pays on time. Vacancy losses come from units that are actually unoccupied, so they reduce the amount you could collect simply because there’s no one to rent to. Credit losses come from tenants who occupy units but don’t pay their rent, so they reduce cash collected without being tied to physical vacancy.

That distinction matters because occupancy and collections aren’t the same risk. A property can have high occupancy but still suffer from delinquencies, or have low occupancy but strong rent collection among the few tenants. In modeling terms, you subtract vacancy losses (from unoccupied units) and credit losses (from nonpayment by tenants) from PGI to arrive at effective gross income.

So the correct idea is that vacancy losses arise from unoccupied units, while credit losses arise from nonpayment by tenants.