When using the income approach to value or when underwriting investment real estate, common practice is to subtract from the Gross Potential Income (GPI) an estimation of the dollars lost through "vacancy and credit loss". This line item is intended to capture the loss of income for vacant space in a building or when tenants slow pay or default on rent. The number to use for this line items varies from 5% in tight markets to 10% (of the GPI) or even higher in areas with high market vacancy rates. Even if your building is 100% occupied, a lender will require some rational number for the vacancy and credit loss when underwriting the deal for purchase or refinance.
GPI = $100,000
Vacancy/Credit loss = 5% ($5,000)
Effective Gross Income = $95,000
Hence this explains the "95% rule" you site
Dec 2, 2015