Knowing how to calculate vacancy rates will help you understand the health and profitability of your real estate investment.
Let’s get into how to calculate the vacancy rate so you can understand tenant turnover, market demand, and the cash flow of your investment property.
But first, here are some key takeaways:
- Vacant unit count divided by total number of units = the physical occupancy rate.
- The rate indicates supply and demand status in the rental market.
What is the vacancy rate?
The vacancy rate is a percentage that shows how many rental units are currently empty in a specific area or property.
It measures the market’s balance between supply and demand and helps you know if it’s an excellent time to buy or sell properties and make rental price decisions.
Calculating rental vacancy rate
The steps to calculate the vacancy rate include determining the total number of units and vacant units and calculating the physical and economic vacancy rates.
Determine the total number of units
The first step is identifying the total number of units in the property or market you wish to analyze. It can include residential apartments, commercial spaces, or any other type of rental property.
Count the vacant units
Next, count the number of unoccupied units within the property or market.
Calculate vacancy rate
Once you have the total number of units and the number of vacant units, you can easily calculate by using this vacancy rate formula:
Physical Vacancy Rate
The physical vacancy rate measures the percentage of vacant or unoccupied rental units or properties within a specific real estate portfolio, building, or market at a given point in time.
The vacancy period can depend on demand; it can last for a number of days, but it can also persist for up to 12 months or more.
This vacancy rate formula provides a better understanding of the actual, real-world vacancies within a particular property or set of properties.
For example, if a rental property has 20 total units and 4 are vacant, the calculation would be physical vacancy rate = (4 / 20) * 100 = 20%.
Here are a few more examples:
Economic Vacancy Rate
The economic vacancy rate is a vacancy rate formula used as a benchmark by real estate investors to evaluate the health and performance of a real estate market.
This formula is not a fixed percentage and can vary depending on specific characteristics, such as location, property type, and economic conditions.
Here is the formula to compute your economic vacancy rate:
For example, if the gross potential rent for your single family home is $10,000 and the effective gross income is $8,000, the Economic Vacancy Amount would be $2,000. The calculation would be:
Economic Vacancy Rate = ($2,000 / $10,000) * 100 = 20%
The average rate of vacancy for different types of rental property
Rental Properties
The average rate for a rental property in the U.S. is around 6%, but this rate can vary from city to city and market to market.
Multifamily properties or apartment buildings
To calculate the rental vacancy rate for multifamily properties, multiply the count of vacant units by 100 and then divide that by the total number of units in the property.
Commercial properties
The commercial vacancy rate depends on property type and location. According to Statista, as of 2023, the average space in commercial properties is 3.6%.
Single-family properties
The average vacancy rate for single-family properties depends on location and market conditions.
Interpreting the vacancy rate
Market conditions
A low market vacancy rate means more people are looking for rental properties, which can make the rental market more competitive, leading to higher prices.
On the other hand, a high vacancy rate means more available rental units than people looking for them, which could result in lower cash income.
Property performance
Calculating the vacancy rate for your property helps assess its profitability and attractiveness to potential tenants.
A higher vacancy rate may point to problems like poor management, pricing, or market conditions. These issues need adjustments to keep the occupancy rate level up.if you’re an Airbnb property manager looking to boost your occupancy rate, I also have an in-depth guide for you to refer to.
Comparative analysis
Comparing vacancy rates with different locations or comparable properties will help investors identify areas with higher growth potential, as well as potential risks and challenges.
Factors Affecting Vacancy Rate
Economic factors: When the economy drops, people may lose jobs and face financial struggles, making it difficult to afford rent. As a result, more rental real estate properties can be empty.
On the other hand, when the economy is thriving and the local unemployment rate is low, the demand for rental property rises, driving up the sales price – which can lead to fewer vacancies.
Supply and demand dynamics: The balance between supply and demand affects the number of empty rental properties.
There are fewer vacancies when many people are looking for rentals, but only a few are available.
Seasonal variations: Vacancy rates can be affected by seasonal changes, especially in a specific rental property like vacation rentals or student housing.
During off-peak seasons, these properties may experience higher vacancy rates when demand decreases due to a declining population of prospective renters.
Investment property owners in such markets should understand the seasonal patterns and plan accordingly to minimize any potential impact on vacancy rates.
Rental pricing: Setting the appropriate rental prices will help attract tenants and maintain high occupancy levels.
If the rent price is too high compared to similar properties in the area, it might discourage potential tenants, leading to more empty rental units.
On the other hand, if prices are too low, it could create higher demand and fewer rental vacancies since they’re often seen as a better deal, but it may affect profitability.
For vacation rentals, use pricing tools for pricing optimization. As a real estate investor, you should always find the ideal balance between competitive pricing and profitability to minimize vacant units.
Property management: Good property management practices significantly impact vacancy rates.
Good real estate investors should prioritize timely maintenance, communicate well with tenants, actively market the rental property, keep tenants, and reduce vacancies.
If you neglect tenant needs, ignore maintenance requests, or don’t communicate, this can lead to high vacancies.
Location and neighborhood: The location and area of a rental property can provide information on how healthy is its market vacancy rate.
When a rental unit is in highly desirable residential areas with high property value– surrounded by amenities, good schools, and nearby transportation– they generally experience lower vacancy rates because of high demand.
On the other hand, properties in less appealing or less accessible areas may have higher vacancy rates. It’s best to consult real estate agents in the area for local market knowledge.
How does the vacancy rate affect rental income?
A high vacancy rate can negatively impact rental income and property owners in multiple ways.
- It decreases rental income as fewer tenants pay rent, reducing profitability.
- It indicates an oversaturated rental market, increasing competition among landlords who may lower rental rates to attract tenants and further reduce income.
- A high vacancy rate extends turnover periods between tenants, requiring landlords to invest time and resources in finding new tenants, which affects cash flow and financial planning.
- Adds additional costs like advertising, tenant screening, and maintenance.
- Creates long term financial strain for property owners with fixed expenses like mortgage payments, insurance, property taxes, and maintenance costs to cover.
- Can impact market perception, making it harder to attract new tenants and maintain consistent rental income.
Reducing vacancy rate
Here are some tips for reducing vacancy rate:
- Focus on providing excellent customer service to reduce vacancy rates. Consider offering incentives for lease renewal.
- Maintain the property’s condition and promptly address repairs, which will help to attract and retain tenants.
- Set competitive rental prices by researching the market and providing move-in specials or discounts.
- Improve property amenities to help make it more appealing to potential tenants.
- Use online and offline marketing strategies to reach your target audience.
- Simplify the application process and build positive relationships with tenants.
Normal vacancy rate
The normal vacancy rate, or the average vacancy rate, is used in real estate to determine how many rental units are empty in a specific market or area. It helps us understand the balance between the supply and demand of rental properties.
Generally, the average vacancy rate ranges from 5% to 7%. It means that about 5% to 7% of rental units are vacant at any time. To find out the average vacancy rate in a particular area, consider these sources:
- U.S. Census Bureau: provides data on national, state, and local rental vacancy rates. Their website has reports and publications with vacancy rates for different regions and cities.
- Federal Reserve Economic Data (FRED): FRED is a comprehensive economic database that offers various indicators and statistics, including rental vacancy rates. It allows you to access historical data and analyze vacancy rates over time.
- Property Management Platforms: ManageCasa and DoorLoop publish articles and reports on rental vacancy rates by city and state. They gather data from multiple sources and provide insights into local market trends.
- Real Estate Market Research Reports: Market research firms such as IBISWorld produce reports on the real estate industry, including rental vacancy rates. These reports offer detailed analyses and forecasts for specific markets.
Consult these sources and analyze their data better to understand the normal vacancy rate in a specific area. Consider different sources and the local market’s unique characteristics.
Wrap-up and my experience with vacancy rates
Knowing how to calculate vacancy rates will help you understand the performance of your property. If you are at higher rates than the market norm, look at your overall strategies and implement some of the ideas I recommend in this article.
When I owned apartment complexes, vacancy rates were higher in the C-Class properties because it was hard to find quality tenants. Having a strong tenant screening process, increasing your marketing, and maintaining the property can help you to attract long-term stable tenants.
In a competitive real estate market, knowing and handling vacancy rates helps you maximize returns on your investment by optimizing occupancy levels and minimizing financial strains.
How to calculate vacancy rate for rental property FAQs
What is vacancy adjustment?
The vacancy adjustment ensures that a property’s income potential is accurately represented by accounting for any vacancy period.
The duration of a vacancy adjustment is not measured in the number of days or months a rental property is sitting empty but is typically expressed as a percentage to estimate the impact of the property’s performance.
These help real estate professionals, appraisers, and analysts better evaluate the property’s current and future financial viability.
How is vacancy loss calculated?
Let’s use this example – total potential market rent for a period is $10,000, and the actual rental income received is $8,000.
The vacancy loss would be $2,000 ($10,000 – $8,000).
To calculate the vacancy loss percentage, divide $2,000 by $10,000 and multiply by 100. The resulting vacancy loss percentage would be 20%.
Here is a table to further demonstrate:
What is NOI?
NOI stands for Net Operating Income. It is a financial metric used in real estate investing and property management to evaluate an income-generating property’s profitability and operating performance.
The formula for calculating NOI is as follows:
NOI = Total Operating Income – Operating Expenses
Total Operating Income includes all revenue generated by the property, such as rental income, parking fees, laundry fees, or any other income sources. It does not have one-time or non-recurring income.
Operating Expenses consist of all the costs associated with operating and maintaining the property. It can include property taxes, insurance, maintenance and repairs, utilities, property management fees, and other expenses directly related to the property’s day-to-day operations.
Nic
Nic is an avid real estate investor who partners with her husband on hotel syndications. Prior to hotels, she owned apartment complexes and single-family homes. Her insider expertise makes her the ideal resource for those seeking to grow their income via property investments.