Vacancy Rate: What It Is And How To Calculate It For Your Rentals
Scott Steinberg7-minute read
May 18, 2021
What does a property’s vacancy rate refer to, and how can you calculate and apply it? The short answer is that your real estate holdings’ vacancy rate reflects how many of your properties are currently sitting vacant or how long they have been unoccupied. (Or tend to sit unoccupied on average.)
Vacancy rate is an essential figure to keep in mind if you’re a real estate investor. Knowing how to calculate and apply vacancy rates won’t just help you evaluate potential investments, it can also help you get a sense of just how well your current holdings are performing.
What Is Vacancy Rate?
In real estate jargon, vacancy rate is typically defined in the form of a percentage that illustrates how many unrented units of any given property holding are currently sitting unoccupied.
Likewise, it can also be expressed in the form of an average that demonstrates how much time these rental units tend to sit unoccupied and vacant, so it’s sometimes referred to as “vacancy factor.”
Knowing how to calculate and apply a property’s vacancy rate is vital for real estate investors. That’s because anyone looking to dabble in investment properties needs to understand physical vacancy rates, economic vacancy rates, and market averages if they wish to know how well a potential or current investment stands to perform or may be doing.
For clarity’s sake, physical vacancy rate refers to how long property units have physically remained vacant over the past year, and how many are currently sitting empty.
Economic vacancy rate refers to how much rent went unclaimed as any given property holdings sat vacant compared to the total you could potentially be making from these investments if they were occupied.
Finally, market vacancy rate refers to the average vacancy rates in your area for different forms of property such as apartment buildings, condominiums and multifamily residences.
In effect, real estate vacancy rates help you get a better sense of how many of your property holdings you may be paying expenses and taxes out on but not receiving income on at any given time. Likewise, they can also help you establish how many of your properties need to be rented in order to break even on your investment or for it to become profitable.
Put simply: Knowing your real estate vacancy rate makes it easier to get a sense of which investments stand to be most lucrative, and which appear to be unlikely earners or underperforming. As you can see, it’s important to keep these figures in mind as you go about weighing buying, holding, or selling any given real estate investment.
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Given that you need tenants in place in your properties to keep vacancy rates low, it bears noting that multiple factors may impact your ability to attract prospective renters. Some will be within your means to control, and others will be outside of it – for example, those driven by health concerns or current economic conditions.
Factors that can lead to low vacancy rates include:
- The economic stability of your chosen geographic area
- Positive real estate market conditions
- A growing number of employers in the region
- Rising quality of life in your neighborhood
- Ability to quickly walk or commute to points of interest
- Easy access to public works, restaurants, shops and other amenities
How To Calculate Vacancy Rate
Wondering how to calculate the vacancy rate? Start by consulting local and county government records and offices, speak with real estate agents and developers, and talk with neighborhood and homeowners associations to find out more about your chosen market.
It may also help to make some phone calls to other owners to see what they’re charging tenants for rents, how much traffic often flows through an area, and what vacancy rates look like amongst neighboring residential and commercial buildings.
Single-Family Property Vacancy Rate Formula
For single-family properties (or other one-unit rentals), first start by calculating the total amount of time that the property sat vacant (days, weeks, months) over a given period (typically a single year). Then divide this amount of time by the total amount of time that these properties could potentially have been rented for.
For example: If your property sat vacant for 8 weeks out of 52 weeks of the year, you would divide eight by 52 to calculate a physical vacancy rate of 15.38%.
Alternately, to calculate economic vacancy rate, you might take the total amount of rent lost (say, $500/week) during the period that the property sat empty, then divide it by the total amount of rent you could have collected for a full year had it been rented ($26,000). Using the above example, your economic vacancy rate would also be 15.38%.
Multifamily Property Vacancy Rate Formula
To calculate the vacancy rate of a multifamily property, you’ll instead wish to take into account the total number of units that are currently sitting empty.
You can do this by multiplying the number of units that are currently sitting vacant by 100, then dividing this amount by the total number of units contained within your real estate property holding.
By way of illustration, say you own an apartment building with 20 spaces in it. Four of these rental units currently sit empty. To calculate your multifamily property vacancy rate, you would begin by multiplying 4 x 100, giving you a total of 400. You would then divide this number by 20 units to calculate a 20% vacancy rate.
How Vacancy Rate Affects Other Real Estate Metrics
Considering investing in real estate? Other indicators of investment potential and performance will work in tandem with vacancy rate to help you get a better sense of how attractive an investment may be.
Vacant units do not produce rental income. Income from these rentals is necessary to maintain a healthy cash flow of monies into your real estate business.
Vacancy rate can also affect your net operating income. Naturally, monies from rental holdings need to be flowing into your pocket in order to generate more revenue and a healthy profit.
Cap rate is short for capitalization rate – a metric that’s used to estimate and compare potential rates of return on real estate property holdings. Rates of return are lowered when vacancy rates are high.
The term gross rent multiplier (GRM) refers to a method of property valuation that investors used to evaluate investment properties. High vacancy rates naturally lower the gross income of a property.
A high vacancy rate can put a real pinch on your return on investment (ROI). Unrented properties do not produce rental income and can add to your expenses as well.
As above, the higher your vacancy rate goes, the less money you bring in, and the less that you stand to be making on every investment dollar you spend.
A lower vacancy rate also leads to a lower occupancy rate, which reflects how many renters are currently living in your property holdings.
Using Vacancy Rate For Your Investment Property
Real estate investors would do well to evaluate vacancy rates as they weigh and evaluate potential real estate investment decisions, and properties’ overall performance. It’s important to understand vacancy rate averages for your area, property type, and market so you know how long and to what extent that properties may sit empty. It’s also crucial to research how comparable properties (“comps”) in your chosen market and region tend to perform as you go about conducting financial forecasting and planning.
Choosing Your Comps
As you go about considering potential real estate investments, you’ll want to start by assessing them against comparable properties of similar size, condition, locale, age and pricing to gauge how relatively low or high a property’s vacancy rate is. Looking at nearby property listings, consulting local and county government websites, and speaking with other owners and real estate professionals in your area can help you get a better sense of vacancy rates on comparable properties.
Understanding Low Vs. High Vacancy Rates
Once you’ve got a sense of your comps, you’ll also want to get a sense of what levels of occupancy constitute low, average and high vacancy rates. High vacancy rates may indicate that a property needs upgrades, may be less desirable (or located in a less desirable setting) to buyers, or may be impacted by outside factors such as the current job market or economic conditions. By way of contrast, low vacancy rates may indicate an influx of new job seekers to the region, the growing popularity of a neighborhood, or increasing demand for the type of on-site amenities and perks that you’re offering.
As you go about doing your research here, be sure to compare rates for different property types in your area such as:
Evaluating A Potential Investment
No matter how attractive your properties are, real estate vacancies are a reality of the business. Using vacancy rate calculations, your goal as an investor is to get a sense of where average vacancy rates lie, how potential investments compare, and what you can do to keep vacancy rates to a minimum. Note that different types of property come with different vacancy rates attached, as do different geographic areas and neighborhoods. A vacancy rate of 15% may be reasonably low for a condominium building in a suburban area, for example, but high for one in the center of a buzzing city.
Analyzing Rental Performance
Using calculated vacancy rate figures can help you make smarter decisions about how well your real estate investments and rental properties are performing. For example, if you have purchased a vacation rental and it sits unoccupied 40% of the time, it may be a less attractive purchase than one that sits empty just 10% of the time. (Unless, in the former case, it’s located in a peak region where you can charge premium rents, such as a cottage on Martha’s Vineyard where you can charge four times the typical rent during the peak summer season.)
In general, poorly maintained and -managed properties will contribute to a growing vacancy rate, while well-managed and -maintained properties will contribute to a lower vacancy rate and more renters. Bearing this in mind, sometimes a short-term expense (a new paint job or various on-site upgrades) may lead to long-term gains thanks to growing renter interest and satisfaction.
The Bottom Line: Keep Your Vacancy Rate Low
Understanding vacancy rates can help you make more educated real estate investing decisions. What’s more, the lower that your calculated vacancy rates go, the higher that your potential investment profits stand to be.
Noting this, it pays to keep as many rentals as full of renters as long as possible (like by offering attractive rental pricing, introducing desirable amenities and upgrades, etc.), thereby ensuring a consistent influx of revenue and income.
Interested in learning more about buying a rental property? Be sure to check out our Learning Center.
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