Learn How to Calculate Vacancy Rate for Rental Property

Before investing in a rental property, it is imperative that you learn how to calculate vacancy rate. This indicator is extremely important when it comes to assessing the potential of an investment. Understanding the implication of this metric is essential for any real estate investor. In this article, we will show you how to calculate vacancy rate and highlight its importance in real estate investing.

What Is Vacancy Rate?

The vacancy rate refers to the percentage of units that are vacant or unoccupied in a given property. This is essentially the opposite of the occupancy rate. High vacancy rates point to low rental sales whereas low vacancy rates indicate that the investment property is renting well.

The Importance of Vacancy Rates in Real Estate Investing

The vacancy rate can be a useful tool in a wide array of situations. It is used to assess the viability of several types of properties. More importantly, it is a highly effective comparison tool that can be used to analyze rental properties relative to the average vacancy rate of a location. The vacancy rate can also help investors determine several other metrics. Here is a brief overview of some of them:

Rental income: This is one of the most consequential metrics that you can determine after you calculate vacancy rate. The vacancy rate can give you an accurate estimation of the income that the property can generate. Additionally, the vacancy rate enables you to determine the net operating income of the investment property.
Cash flow: This refers to the profit that the property generates after deducting expenses. Calculating cash flow requires using the net operating income. The vacancy rate can be the difference between positive cash flow and negative cash flow.
Cap rate: This is another metric that incorporates the net operating income. The capitalization rate is the return on investment that a property generates based on its expected income. To calculate the cap rate, you should divide the net operating income by the current property value.
Occupancy rate: As we have stated earlier, this is the exact opposite of the vacancy rate. The result of adding the two should equal 100.

To use the vacancy rate in the most effective way possible, you should only utilize it when analyzing properties that are similar. Using it to compare different types of investment properties will invariably yield unreliable results.

How to Calculate Vacancy Rate

how to calculate vacancy rate

The vacancy rate formula is fairly straightforward. You simply multiply the number of vacant units by 100 before dividing by the total number of units. Below is a simple example that illustrates how to calculate rental vacancy rate using this formula.

Let’s take an apartment building that has 60 units, with 8 of them being unoccupied. Let’s also posit that the average vacancy rate in the area is 5 percent. Using the formula will give us a clear idea of how this building compares to this average.

The first step is multiplying the number of unoccupied units in the building by 100:

8 x 100 = 800

The next step is dividing the result by the total number of units:

800/60 = 13.33% vacancy rate

This investment property is not performing well since its vacancy rate is higher than the average for that area. The property owner should, therefore, identify the causes behind this and take the necessary actions to remedy the issue.

Understanding Average Rates

While the average vacancy rate for rental properties in the US is 7%, the rate varies from city to city. In certain markets, you’ll even notice a wide discrepancy between neighborhoods. Generally speaking, 2% to 4% is considered a decent rate for metropolitan areas. You can find a detailed breakdown of vacancy rates in each area by clicking here.

Another important thing to keep in mind is that average vacancy rates are different for various types of properties. Here are some of the average rates for different types of residential real estate.

1 – Short-term rentals

These are self-contained properties that are rented for short periods of time. Since Airbnb occupancy rates are not consistent, the vacancy rate of short-term rentals is predictably high. The average rate is around 30%

2 – Vacation rental properties

These are short-term rentals that people use for vacations. Due to their seasonal nature, these investment properties have the highest vacancy rates in the market. Their vacancy rate is 45%.

3 – Multifamily properties

These are structures that house multiple families. They consist of two to five units. Their average vacancy rate is 5.5%.

4 – Single-family properties

This refers to stand-alone structures that accommodate one family. They consist of a single unit. Their vacancy rate is 5%.

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5 – Apartment buildings

This refers to apartment complexes that consist of five units or more. They typically boast a very high tenant retention rate. Their average vacancy rate is 4.7%.

The Factors That Impact Vacancy

Much like average occupancy rates, vacancy rates are impacted by a number of external factors, besides the type of property. Real estate markets that are plagued by the following economic issues are more likely to have high tenant turnover.

1 – A limited job market

One of the leading causes of high vacancy rates is the lack of flexibility in the job market. This is especially the case in small cities where one core employer is anchoring the local economy. The impact of this employer leaving can be disastrous. This is the main reason why real estate investors should avoid these markets.

2 – A low-income workforce

A low-income workforce is not a good sign for real estate investors. The rental industry tends to suffer in markets that are short on cash. Long-term rental strategies, in particular, are difficult to implement in these conditions.

3 – An over-saturated real estate market

Overbuilding can be extremely detrimental to the viability of a real estate market. Areas that are characterized by a high rate of construction end up registering a decrease in demand. It’s advisable that you invest in real estate in an area that doesn’t suffer from this saturation.

Learning how to calculate vacancy rate is an important part of investment property analysis. As a matter of fact, it is one of the few predictive analytics that gives you an accurate estimate of an investment’s profitability. In addition to the vacancy rate, you can also use several Mashvisor tools to evaluate investment properties. A perfect example of this is the rental property calculator. To learn more about this product, click here.

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