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ContinueUnderstanding how to calculate vacancy rate and reduce it for your rental properties is vital for operating a professional, profitable rental business.
Understanding what the vacancy rate is, how to calculate the vacancy rate, and how to reduce it is vital for operating a professional and profitable rental business.
Ideally, you want to keep your vacancy rate as low as possible. Vacant properties aren’t earning money but you still have all of your overheads and costs associated with the property. Long and drawn-out vacancies can cost landlords $1,000's in expenses and opportunity costs.
In this article, we take a closer look at how to calculate vacancy rate, how to use it to assess a potential investment, and what vacancy rates can tell you about your current properties.
The vacancy rate of a rental property is the period in which it is untenanted over the year. A low vacancy rate is generally a positive thing, meaning a high occupancy rate and a maximized potential income.
A vacancy can occur for any number of reasons. For example, after a signed lease expires there may be a period where the landlord or property manager is searching for new tenants.
It may also happen if a tenant moves out early or unexpectedly or is evicted, or if the property becomes uninhabitable due to required maintenance work.
Vacancy rates are crucial for property owners as they reflect how well their investments are performing compared to market averages.
Low vacancy rates are generally positive, indicating high demand for living in a particular area or building, while high vacancy rates suggest the opposite.
To be meaningful, investors should research vacancy rates in the area to get a comparable benchmark.
Several factors affect vacancy rates in rental properties:
Related: 15 Best Places to Invest in Real Estate in 2024
Typically, the vacancy rate is calculated on an annual basis and shown as a percentage. Vacancy rates can be used in different ways to understand your property’s performance.
You can calculate your vacancy rate in one of two ways.
If a single-family home is vacant for 3 weeks between tenants, the vacancy rate would be calculated as follows:
Vacancy Rate = 21 days vacant/ 365 rentable days = 0.057 or 5.7%
For a 4-unit multifamily property, vacancy rates can be calculated per unit or for the entire property. Here's the calculation per unit:
The average vacancy rate for the property can also be calculated as:
Average Vacancy Rate = 85 total vacant days / 1,460 rentable days (365 days × 4 units) = 5.8
Calculating vacancy rates on an aggregate basis provides a high-level view of property occupancy. However, examining per-unit vacancy rates is valuable for identifying specific issues, such as the need for updates or rent adjustments for a particular unit.
To calculate the vacancy rate for a rental property portfolio comprising one 4-unit multifamily property and three single-family properties:
The average portfolio vacancy rate is: Average Portfolio Vacancy Rate = 6.8%
This rate helps investors understand potential rental income lost due to vacancies. If we take the example above and say it has portfolio with a gross potential rental income of $1,500 per month per unit, then we can calculate the total lost revenue due vacancies like this:
Gross Potential Rental Income = 7 units × $1,500 per month × 12 months = $126,000
Vacancy Expense= 6.8% × $126,000 = $8,568
Effective Gross Rental Income = $126,000 gross potential rental income − $8,568 vacancy expense = $117,432
According to Landlord Studio’s data which amalgamates over 50,000 properties across the US, the average number of properties that were vacant at any one time fluctuated between 6% and 7% in 2023.
According to a US Census Bureau, which conducts a survey on residential vacancy each year, in Q1 of 2024, the average vacancy rate for residential properties was 6.6%. Commercial Real Estate vacancies may differ, and you can find this data on websites such as Statista.
The lower your vacancy rate, the lower the economic impact of this vacancy, and the better performing your property will be.
Related: How Much Does Rental Turnover Actually Cost?
As mentioned above, various things can increase your rental property vacancy rate.
Areas with larger economic growth typically have more demand for rentals and make better locations for investment. However, there isn’t much that you can do if this is the reason for your vacancies other than looking at alternative locations to invest.
However, there are some factors you can control, such as how you manage your properties, the systems you have in place, and the tools that you use.
A streamlined and efficient process for finding and screening new tenants will help you keep any vacancies to a minimum.
A few things you can do to improve this process are
Once you’ve secured an awesome tenant you want to make sure the moving-in process goes off without a hitch.
Sending through a detailed welcome letter that outlines the key things your tenant needs to know about the house is a great start.
Following that, something that often yields great ROI is leaving a welcome package for your tenants upon move-in.
Dilapidated, dated, or shabby properties are less desirable. Nobody wants a kitchen that looks like it came out of a 1960s catalog. On top of this, if something breaks and you never fix it, this could cause friction between you and your tenants and lead them to want to move out sooner.
A poorly maintained property then, could actually cost you more money than the cost of regular maintenance.
Related: What is Property Maintenance and What Do Landlords Need to Know?
Make sure that your rent is competitive. If you charge too much rent, even if your property is nicer, tenants will be put off because they believe they can get a better deal elsewhere. But, if you charge too little you're leaving money on the table and could find your profits don't match your expectations.
Related: Setting Rent: How Much Should I Charge for Rent?
Missed and late rent payments are the leading cause of evictions in the US. Collecting rent online with a purpose-built rent collection tool, like Landlord Studio, is more convenient for both parties and more secure.
With Landlord Studio your tenants can set up automatic payments to ensure they never forget to pay again. Payments are made directly into your bank account Additionally, landlords can collect deposits and tenant payable expenses and tenants can view historic and upcoming payments via the tenant portal.
Related: The Best Way to Collect Rent Payments From Your Tenants
To compete with other properties in your area (especially new buildings and better-located properties), think of how you could increase the appeal of your building. Can you modernize the kitchen and bathroom? Replace old and worn-out carpets? Can install new appliances, offer tenants storage space in the basement, or provide parking?
Making even minor improvements to the amenities offered could have a big impact on the overall desirability of your property.
Related: Rental Property Accounting 101: Capital Improvements vs. Repairs
When looking at potential investments and analyzing deals, it’s helpful to know the market average as well as the property’s historical vacancy rate. A high vacancy rate compared to the local market average suggests that there may be issues with the property. It could need maintenance work and improvements, or it might be that you will need to reduce the current rent to make it more desirable.
As a prospective buyer, this could highlight an opportunity to add value to the property, reduce vacancies, and increase profitability. However, it’s also a red flag, especially if you’re a new investor who doesn’t necessarily have the experience required to make an underperforming property perform.
Another key reason to keep a record of your vacancies is that a low vacancy rate shows good management of your portfolio. This can be a helpful real estate metric if you want to approach lenders for refinancing opportunities to grow your portfolio further.
Landlord Studio has a real-time vacancy rate tracker on our dashboard as well as a vacancy rate report that you can run on your historical data as evidence of your property management capabilities.
The rental property vacancy rate is one of the most important metrics for real estate investors to understand. It can highlight issues with a potential investment and indicate that you need to change your management style or reduce rents.
The easiest way to stay on top of vacancy rates is to use a tool like Landlord Studio.
Landlord Studio provides up-to-date data on your portfolio’s performance metrics, including vacancy rate, as well as providing all the tools you need to increase your portfolio’s performance.
Find and screen tenants, manage maintenance requests, collect rent online, track leases and store important documents, and even manage your rental property finances.
Landlord Studio is an easy to use property management and accounting software designed for landlords.
Find and screen tenants, collect rent online, track income and expenses, run reports, and more - all for free.
Learn how you can simplify your year-end tax preparations. Join Our Free Webinar with guest speaker, Real Estate CPA Thomas Castelli.
Hosted by: Logan Ransley, Landlord Studio Co-Founder and Thomas Castelli, The Real Estate CPA
Where: Replay Coming Soon
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