Last Updated on October 17, 2022
How To Calculate The Vacancy Rate On A Rental Property
You’ve got a bunch of empty units. You’re running the numbers in your head, trying to figure out if they’re worth renting again or what you could get for them if you sell them off. But how much exactly does this affect your bottom line?
Understanding your rental property vacancy rate helps you better understand your business and make more informed decisions about managing your properties. This can lead to increased profitability for short-term and long-term goals such as retirement savings or buying another property.
What is the vacancy rate?
It’s the percentage of units that are vacant at any given time. For example, if you have 100 apartments and two are empty, your vacancy rate is 2%. That’s a pretty low number. If you’re seeing higher than that, it might be worth investigating.
The lower your vacancy rate, the more income-producing properties you have. If you’re interested in buying a rental property as an investment or part of your retirement plan, keeping this number low will help ensure that even if one unit is vacant for a while, tenants will still need to rent from you.
Why is the vacancy rate important?
The vacancy rate is a key indicator of the health of the rental market. It can help you make decisions about your property, as well as your property management and marketing strategies, and even the tenant screening process.
- The vacancy rate is important when determining if a property has a good return on investment (ROI).
- A high vacancy rate indicates that there are many available units in the market, which may mean it’s time to sell your property.
- On the other hand, if there are few vacancies, it means there aren’t any available units for potential renters or buyers in your area.
How to calculate rental property vacancy rate
To calculate the vacancy rate on a rental property, you need to know how many units are vacant and how many units are occupied. You can use a simple equation to figure out the vacancy rate:
- [Rental Property Vacancy Rate] = number of vacant units / total number of units
- [Rental Property Vacancy Rate] = number of vacant units / total number of occupied units x 100
So, if you have 10 units and 6 are vacant (vacancy rate = 60%), your rental property vacancy rate is
60% = 6 / 10 x 100
You can also use a free modern online calculator like Turf Press’ Vacancy Calculator to calculate your actual vacancy rate so that you can make smart decisions about how to improve occupancy rates and maximize profits at your property.
What vacancy rates are good for investors?
The higher the vacancy rate, the lower your income. The lower your income, the less likely you are to make money and keep your investment property as an asset on your balance sheet.
One good rule of thumb for what vacancy rates are good for investors is, if you can find something that’s under 5% in a market where tenants are looking for housing and there’s not much supply, then it’s probably a pretty good deal that will produce some decent cash flow on your return.
But if it’s over 10%, then maybe don’t bother investing there because there may not be enough demand or too much competition from other investors who are chasing similar yields.
What factors influence the vacancy rate in a rental property?
Price of property
A higher price means fewer renters will be able to afford it, so you’ll have a higher vacancy rate. This is especially true for rentals that are new or have just been renovated. It will be easier to fill your property if you charge a fair price.
Areas with high crime rates tend to have higher vacancy rates than those without such problems. This is especially true in urban areas where there are many low-income families. The crime rate also affects property values, which can lead to higher vacancy rates and lower rents.
Areas where there are few jobs available also tend to have fewer tenants than other areas that offer job opportunities for residents.
Neighborhoods where homes are older or not kept up well tend not only to attract poorer residents but also to reduce demand from potential renters who would prefer newer buildings with better amenities. A quiet, safe neighborhood with good schools tends to attract more renters than those with poor schools.
The type of community also plays a role in the demand for rental homes. For example, college towns tend to have higher vacancy rates than those with no local university or only a small one.
When the economy is doing well, people have more money in their pockets and are more likely to move out of family homes into of their own places. This can lead to a lower vacancy rate for rental properties.
Property Conditions and Amenities
A property that is well-maintained and clean will attract more renters than a property that needs repairs or updating. Also consider that rentals with amenities like pools, gyms, playgrounds, and even things like washers and dryers are more popular than those without such features.
If it’s a large corporation, then there may be less personal attention given to each unit, because their focus is on managing huge numbers instead of caring about each resident’s needs.
Type of property
Apartments tend to have higher vacancy rates than houses or duplexes. The same is true for older buildings, poorly kept up, or located in areas with undesirable school districts.
How Owners Can Reduce Vacancy Rate
Review your lease agreement
Look at the terms of your lease agreement and see what you can do to make it more attractive.
- For example, if you have a no-pets rule then consider allowing pets under certain conditions (a small fee or deposit) so that people who want them don’t automatically pass over your property because they don’t have any other options.
Have a good screening process
The screening process is the most important part of determining who gets to live in your rental property. You should have a written application that asks for basic information such as income, employment status, and credit history.
It may also be worthwhile to get references from previous landlords or employers if possible; this can help you weed out people who are likely to cause problems down the road.
Have a good maintenance plan
You need to be prepared for any maintenance issue that may come up. It’s important not only to have an emergency fund but also to have a plan for how you’ll deal with things like plumbing or electrical problems.
You should also get renter’s insurance, which will cover damage from fire, windstorms, and other disasters. This is especially important if your property has more than one unit.
Have a good marketing plan
You will also want to have a plan for marketing your properties. This can include posting flyers in your neighborhood, using social media, and creating a website for your property. Make sure that all of these are up-to-date, accurate, and attractive so that people will want to rent from you.
Flexible with your tenants
Be open to negotiation, as well as working with your tenant if they have issues that need to be resolved before they move in.
It’s best to ask around first and do some research. Make sure they have experience with the type of property you are looking to rent out, as well as the area. Also, make sure they have good references from other landlords and owners in your area.
Know your vacancy rate = Being better prepared financially
When you’re able to calculate your vacancy rate, you’ll be better prepared to manage your finances.
You can use the vacancy rate to compare properties and determine which ones are worth investing in. You’ll also be able to decide what repairs and improvements should be made first. The vacancy rate is a key indicator of the health of your rental property. It can help you decide what type of repairs to make and when it’s time to sell. The rate will also give you an idea of how much rent you should charge for each unit.
Understanding the vacancy rate on your rental property is important for making informed decisions about how to improve your business. By maintaining a high occupancy rate, you’ll prevent yourself from losing money and keep your property in great condition for new tenants.
It allows you to see how effective your marketing efforts are and how many potential tenants there are in your area. Calculating the vacancy rate can be tricky, but once you know the basics, it will become easier every time!
New to real estate investing? Check out our article on the best business structures for real estate investors. And you can be on your way on becoming a real estate expert by reading about investing in multifamily properties.
Adam Smith has spent the last 5 years in the Private Money Lending world helping real estate investors secure financing for their non-owner occupied real estate investments. When he’s not thinking about real estate, Adam is an avid Jazz music fan and fisherman.