For real estate investors hoping to maximize their rental property’s value and profit, understanding how to accurately measure vacancy rate is essential. This metric can substantially influence your net operating income (NOI), return on investment (ROI), and overall worth of a rental property.
In this blog post, we’ll discuss the vacancy rate, historical occupancy rate trends in the US, different methods for measuring vacancy, and tips for investors to help keep vacant units low at their properties.
What Is a Vacancy Rate?
A vacancy rate is an essential metric in real estate investing. It is the percentage of days in a building or portfolio of buildings not occupied by tenants over a specific period of time.
By tracking their vacancy and comparing it to similar properties in the local real estate market, investors, real estate agents, and property management can better understand what strategies will help them maximize their returns on rentals and increase property valuations by avoiding high vacancy rates. This information can also provide insight into improving tenant retention rates, which is critical for an investor’s bottom line.
Additionally, comparing the overall vacancy rate locally will help investors understand current trends in rental demand and short-term fluctuations in supply and demand. By understanding these dynamics in the local rental market, investors can ensure that they are making the most of their investment opportunities.
How To Calculate Vacancy Rate
To calculate the vacancy rate using the number of days method for an entire year, follow these three steps:
- Start by adding up all of the days a property is empty during a given year (365 days)
- Divide this total number of days by 365 to get the average percentage representing the vacancy rate
- If a property were empty for 30 days over the entire year, its vacancy rate would be 8.2% (30 / 365 = 0.082 x 100% = 8.2%)
The above example shows how easy it is to calculate vacancy for one single-family home. However, calculating the rate for a number of vacant units can be more complicated because the rates of each unit are likely to differ. This means that when calculating the total vacancy rate, it is necessary to consider all individual units and the days each is unoccupied.
Here is an example of how to calculate the vacancy rate for a 3-unit multifamily property, with one unit being vacant for 30 days of the year, the second unit for 45 days, and the third fully occupied during the entire year:
- Determine the number of rentable days by multiplying the total number of units by 365 (3 x 365 = 1095)
- Add up the total number of days that each unit was empty during the year (30 + 45 + 0 = 75)
- Divide this number (75) by the total rentable days (1095) to get the average vacancy rate (75 / 1095 = 0.068 x 100% = 6.8%)
This means that over the course of one year, an apartment building with three available units had an overall vacancy rate of 6.8%.
Rental Property Portfolio
In this example, we will explain how to calculate the vacancy for a 10-unit portfolio, which consists of five single-family rentals (SFRs) and five vacation rentals:
- Start by determining the total rentable days by multiplying the number of rental units by 365 (10 x 365 = 3650).
- Then add up the total number of vacant days for each unit. For the SFRs, this is 0 + 15 + 30 + 45 + 60 = 150 and for the vacation rentals it is 60 + 90 + 120 + 120 + 180 = 570
- Next, divide the total number of vacant days (150 + 570 = 720) by the total rentable days (3650) to get the average vacancy rate (0.197 x 100% = 19.7%)
This means that over the course of one year, this 10-unit rental property portfolio had an overall vacancy rate of 19.7%.
Why Vacancy Rates Differ by Property Type
It’s important to remember that vacation rentals can sometimes suffer from higher vacancy than long-term rentals due to seasonality and other factors. However, their higher rental rates typically result in increased gross income, making them attractive investment opportunities for those looking to maximize their potential returns.
When calculating the vacancy rate for a rental property portfolio, an investor can group all the units into one category and calculate the overall vacancy rate or break the portfolio down into individual categories such as single-family rentals (SFRs) and vacation rentals.
Doing this can prevent the vacancy from being distorted by combining units with a natural rate (e.g., vacation rentals) with those known to have lower vacancies (SFRs). Calculating at the portfolio level makes it easier to compare different portfolios, while calculating at the category level gives more insight into how each type of rental is performing.
At the same time, both methods can provide valuable information as to whether a portfolio will generate sufficient income compared to similar properties. For instance, if a portfolio has a higher-than-average vacancy rate for vacation rentals but lower than average for SFRs, it could still be a profitable investment opportunity due to the potential of earning more from those short-term stays.
Historical Vacancy Rates in the US
Investors sometimes ask if there is a “normal” vacancy rate for investment property. We can look at historical US rental property vacancy rates to answer that question. The most recent data from the St. Louis Fed (Q3 2022) indicates that the overall national average rate is hovering at around 6%. Today’s rental vacancy rate is the lowest it has been since 1985, indicating that demand for rentals is growing.
Factors such as lifestyle changes, an influx of millennials and zoomers (Generation Z) into the rental market, and rapidly increasing costs of owning a home have all contributed to more people renting than owning, creating a consistently declining vacancy rate for rental housing. This situation has been further exacerbated by the current economic climate, presenting landlords with both opportunities and challenges in adapting to this new landscape.
Other Factors Affecting Vacancy Rate
Vacancy rates can also be significantly affected by the location and the time of year:
- In a college town, vacancy rates may peak during the summer months when students are away from campus for an extended break.
- Vacation rentals will likely experience higher vacancy rates during the off-season when people tend to stay at home due to colder climates or other factors.
- Suburban single-family rentals where tenants work from home may experience lower vacancy rates because of their convenient location and because people who can work remotely are increasingly choosing to do so.
Aside from the above factors, having a rental property in an area with a low neighborhood rating can also affect vacancy rates. A low neighborhood rating usually refers to an area with higher than average crime rates, poorer quality schools and infrastructure, and fewer amenities or shopping opportunities. These neighborhoods tend to be less desirable for renters and property owners alike.
Additionally, failure to properly maintain a rental property or not offering amenities such as updated appliances or attractive finishes can also contribute to reduced occupancy. Landlords must consider all of these factors and take necessary steps to ensure their properties remain desirable for tenants.
Impact of Vacancies on Key Metrics
Vacancies and tenant turnover can significantly impact rental income, cash flow, and ROI. Vacancies represent lost revenue, as they are periods when the property owner is not receiving rent. During these periods, repairs may need to be done to the units before new tenants move in – resulting in additional costs that will further reduce profits. Tenant turnover also increases expenses as landlords need to cover re-leasing fees, cleaning costs, maintenance, and repairs – all of which add up quickly.
Furthermore, vacancies can lead to a decrease in overall return on investment (ROI). This is because vacant properties have carrying costs such as taxes, insurance, and mortgage payments that still need to be paid without any offsetting revenue from the rental unit. As a result, investors need to consider vacancy rates in their calculations when assessing potential rental property investments and figure out how this will affect their expected return on investment.
To maximize profits and ensure positive cash flow, investors should focus on strategies that seek to minimize vacancies. Doing so helps ensure their portfolios remain profitable regardless of market conditions.
5 Tips to Keep Occupancy Levels High
Keeping occupancy levels high is essential for real estate investors who want to maximize their returns. Vacant properties mean lost revenue, as there is no rent coming in, and carrying costs still need to be paid. That’s why it’s important to ensure that units are well-maintained, competitively priced, and attractive to potential renters. Here are five tips that investors can use to keep their occupancy levels high:
- Keep rental rates competitive: Knowing the market rent of similar properties helps keep rates in line with what tenants are willing to pay.
- Market aggressively: Advertise your units to reach a wide variety of potential tenants on various platforms such as websites, social media, and local newspapers.
- Make the application process easy: Streamlining the application process by offering online forms or pre-screening applicants over the phone can help speed up approvals and increase demand for your properties.
- Keep your units well maintained: Regularly inspecting and repairing any issues promptly demonstrates that you take care of your property, making tenants feel more secure about their living arrangements.
- Perform regular home visits: Doing regular walkthroughs lets tenants know that you care about the property and that any maintenance issues will be taken care of quickly.
Knowing what a vacancy rate is and how it impacts real estate investors can help them maximize returns on investment while reducing expenses associated with empty properties throughout their portfolios. By considering historical market vacancy rate trends in a particular area, utilizing various methods of calculating vacancies wisely, minimizing voids through pricing strategies, and intelligent management techniques—real estate investors can enjoy strong returns across multiple rental property investments over time.
Finding a rental property with a low vacancy rate can be challenging, even for the most experienced real estate investors. With numerous investment opportunities available, navigating the unknowns and managing properties can be challenging.
That’s why Arrived provides investors with a way to reduce risk and simplify processes when searching for investments. Please have a look at our selection of homes now; you may find that your initial investment could yield significant growth in years ahead.