Knowing how many rental units are unoccupied for landlords is critical for their real estate investments. Rental vacancy rates show a high demand for rentals or if too many places are available. This helps landlords set competitive prices, identify potential growth opportunities, and make smart investment choices.
This article will explain everything about rental vacancy rates – what they are, how to calculate and figure out what’s a good vacancy rate.
What are Rental Vacancy Rates?
Rental vacancy rates show the percentage of empty rental properties in a specific area at a certain time. They help us understand how many people are looking for homes and how many rental properties are available. Real estate investors and landlords use these rates to decide prices, investment choices, and possible growth.
When vacancy rates are low, there’s high demand for rental homes, leading to higher prices and competition for available places. Conversely, high vacancy rates may suggest too many rental homes, resulting in lower prices and less competition.
Knowing that a low or high vacancy rate can change based on the place and other factors is important. For example, a 5% vacancy rate might be seen as high in one area, but in another place, a 10% rate could be considered normal.
Vacancy Rate Calculator
To calculate the property’s vacancy rate, you’ll need two key pieces of information: the total number of units in the building and the number of currently vacant units. You can find these numbers in your ledger if you’re already the property owner. If you are considering buying a new property, ask your real estate agent to get this info from the current owner or do some online research on your own.
Learn how to calculate the vacancy rate using the formula below:
| Vacancy Rate Formula | = | Number of Vacant Units | ✕ | 100 |
| Total Number of Units |
Example of vacancy rate formula calculation:
Consider an apartment complex with 80 units, where 12 units are not occupied. To determine the vacancy rate, we use a simple formula: multiply the number of vacant units by 100, then divide by the total number of units (80).
Calculation: (12 vacant units x 100) / 80 total units = 15% vacancy rate
In this example, the rental property has a 15% vacancy rate. Comparing this to the area’s average vacancy rate of 5%, it’s evident that the building is not performing as expected.
It’s crucial to investigate the reasons behind the high vacancy rate to address the issue. Possible factors include:
- Overpricing, outdated facilities
- The need for repairs
- A lack of attractiveness and amenities in the building
What is a Good Rental Vacancy Rate for Rental Property?
A good vacancy rate means there’s a balance between the number of empty rental homes and the number of people looking for a place to live. It’s like having enough options for renters without too many vacant homes. What’s considered a good rate depends on where the property is and other factors like the type of home and how the economy is doing.
Typically, a healthy vacancy rate is around 5% to 10%. This means there are enough homes for rent, but not so many that lots are sitting vacant. If the rate is below 5%, it could mean there’s not enough places for rent, making it harder for people to find a home, and prices might go up. If it’s above 10%, there might be too many empty homes, which can lower prices and make it tougher for landlords to make money.
It’s essential to remember that what’s considered a good vacancy rate can vary based on where the property is and what type of home it is. For instance, a lower vacancy rate might be normal in a busy city where many people want to rent. In contrast, a higher rate might be okay in a quieter area with fewer people looking for homes.
Also, the kind of property matters. Places with tall apartment buildings might have a different acceptable rate than areas with single-family houses. Overall, a “good” vacancy rate helps landlords make money and provides enough options for renters in a specific area.
Factors Affecting Rental Vacancy Rate
Understanding the factors influencing rental vacancy rates provides more valuable insights than just looking at the overall vacancy calculation. Numerous factors impact how frequently and for how long a property remains unoccupied. Some factors are entirely within the control of the property owner or landlords, while market forces primarily influence others:
1. Economic Factors
This involves a decrease in the number of people living in an area or a rise in the local unemployment rate.
2. Competition
Other properties, such as recently built apartment complexes or a group of single-family rental homes in a neighborhood, can impact the rates you can charge for rent.
3. High Rent Prices or Rent Increases
This could lead to a high tenant turnover rate because renters might be unable to afford your rental cost, pushing them to seek a more affordable option elsewhere.
4. Lack of Demand for the Property Type
Every tenant has different needs and preferences. If your property doesn’t have the right number of bedrooms for the local market or is missing amenities that tenants expect, people may choose not to rent it.
5. Unresolved Tenant Maintenance Issues
If landlords don’t do their job, existing tenants might leave or tell potential tenants about ongoing problems. For instance, a water leak can cause mold later, or a broken door lock can jeopardize the safety and security of the tenant.
6. Hiring an Understaffed or Inexperienced Property Management Business
This leads to dissatisfaction among tenants and decreased property worth because of inadequate maintenance and difficulties in collecting rent.
The Bottom Line
A vacancy rate shows how many empty homes or apartments a rental property has. Investors need to figure out how much money they can make and spot any issues with the property. The average vacancy rate can differ based on many things, so it’s just one part of checking if a rental property is good. An investor who knows much about the rental market can turn things around even if many homes are empty by finding good tenants, keeping the places full, and making more money.
Trevor Henson
Trevor Henson is an experienced entrepreneur (10+ highly-successful start-ups) and property investor with a demonstrated history of building and leading teams in investment property management environments, maximizing returns for property owners, and optimizing properties through construction management and re-positioning. He…Learn more about how we can help. Customized solutions for large portfolios!