Understanding your vacancy rate, how to calculate it, and how to reduce it is vital for operating a professional, profitable rental business.
Rental property vacancies are inevitable. Leases come to an end and tenants move out. You will at times need to find new tenants or even do overdue maintenance or property improvements.
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. Understanding what your vacancy rate is, how to calculate it, and how to reduce it is vital for operating a professional and profitable rental business.
The vacancy rate of a rental property is the period in which it is untenanted.
This generally happens after a signed lease expires and whilst the landlord or property manager is searching for a new tenant. However, it may also happen if a tenant moves out early or unexpectedly, or if the property becomes uninhabitable due to required maintenance work.
You can calculate your vacancy rate in one of two ways.
Typically, these are calculated on an annual basis and shown as a percentage. There are three different vacancy rates that can be used to understand your property’s performance.
According to Landlord Studio’s data which amalgamates over 30,000 properties across the US, the average number of properties that were vacant at any one time fluctuated between 5% and 6% in 2021.
According to a US Census Bureau, which conducts a survey on residential vacancy each year, in Q3 of 2021, the average vacancy rate for residential properties was 5.8%. 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.
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. Whilst some of that vacancy could be due to mismanagement of the current owner or property management company, a high vacancy rate compared to the local market average suggests that there may be issues with the property. It could need maintenance work, improvements, or it might be that you will need to reduce the current rent to make it more desirable.
As a prospective buyer, this potentially is an opportunity to add value to the property, you could decrease the vacancy rate and increase profitability. If it’s because the property is undesirable, you could make improvements and increase both the rent rate and decrease vacancies. 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 supporting 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.
To calculate the physical vacancy rate for a single family home, you take the total number of days that the property is empty, divide that by the number of days in the year, and multiply that by 100.
Eg. (21 (days vacant) / 365) x 100 = 5.8% vacancy rate.
This will give you an annual vacancy rate for your portfolio as a whole, take the number of vacant units, divide it by the total number of units that are in your portfolio, and multiply it by 100.
You can calculate the economic vacancy rates by determining how much a day’s worth of rent is and multiplying by the number of vacant days. For example, if your property rents for $1,000 a month and there are 30 days in the month, that’s $33 a day. If you’re vacant if your property were vacant for 21 days then that would equal $700. From this, you can calculate an annual economic vacancy rate for the year by dividing $700 by the total amount of expected rent, which would be in this example 12,000. This would give you a 5.8% economic vacancy rate.
To calculate the market vacancy rate, you will need to do market research specific to your property’s location. Sites like Zillow or the US Census Bureau offer this data.
There are various things that can increase the likelihood of your vacancies.
The first is economic conditions and low demand. Areas with larger economic growth typically have more demand for rentals and make better locations for investment. There isn’t a lot that you can do if this is the reason for your vacancies other than to look at alternative locations to invest.
The second factor is property management. For example, poor property management, bad upkeep, and overpriced rate rent. These factors can be off-putting to tenants and will likely contribute to high tenant turnover. Thankfully, there is a lot that can be done to address these latter factors to reduce vacancies.
Rundown or shabby properties are less desirable, and tenants. This could make it harder to find tenants and will contribute to a high tenant turnover. By providing a pleasant, safe home you can reduce the likelihood of tenants moving out.
Make sure that your rent is competitive. While you certainly don’t want to be charging too little in rent charging too much can be equally as bad. 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.
Read our article on how to set the right rent price.
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. For instance, you can install new appliances like a washer and dryer, offer tenants storage space in the basement, or provide parking.
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
Using a good process you should be able to select a good tenant that can and will pay rent on time and in full. Ideally, this tenant has a stable job and income, and a positive rental history – both of which are indicators they’ll stay in a great rental for years to come.
While sometimes vacancies are inevitable there are a lot of things that you can do to keep this vacancy rate as low as possible.
Having a tool like Landlord Studio you can easily keep track of your current occupancies with our inbuilt vacancy rate calculator, plus set reminders for lease end dates and start dates, and use features like rental listings and tenant screening to streamline your tenant application process to help reduce costly vacancies.
Our software also gives you all the accounting features you need to track all your income and expenses on the go. Plus, collect rent online and automate tenant communications.
* First 3 properties free.