How To Calculate Vacancy Rate For Rental Properties (And Reduce It)

Vacant properties mean that you're not earning money on your rental property investment. Not only that, but you still have all of your overheads and costs associated with the property. Long and drawn-out vacancies can cost landlords $1,000's in expenses and opportunity costs. 

In this article, we take a closer look at how to calculate vacancy rate, how to use it to assess a potential investment, and what vacancy rates can tell you about your current properties.

What is a vacancy rate for a rental property?

The vacancy rate of a rental property is the period in which it is untenanted over the year. A low vacancy rate is a good thing - it means you have a high occupancy rate and are maximizing your potential income. 

A vacancy can occur for any number of reasons. For example, after a signed lease expires there may be a period where the landlord or property manager is searching for new tenants.

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Why is the vacancy rate of a property important to calculate?

Vacancy rates are crucial for property owners as they reflect how well their investments are performing compared to market averages.

Low vacancy rates (i.e. the period time a property is vacant for) are generally positive, indicating high demand for living in a particular area or building, while high vacancy rates suggest the opposite.

To improve the likelihood of a sucessful investment, investors should research vacancy rates in the area to get a comparable benchmark. 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. A high vacancy rate compared to the local market average suggests that there may be issues with the property. It could need maintenance work and improvements, or it might be that you will need to reduce the current rent to make it more desirable.

As a prospective buyer, this could highlight an opportunity to add value to the property, reduce vacancies, and increase profitability. 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 real estate metric if you want to approach lenders for refinancing opportunities to grow your portfolio further.

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What does vacancy rate tell you?

Typically, the vacancy rate is calculated on an annual basis and shown as a percentage. Vacancy rates can be used in different ways to understand your property’s performance.

1. Physical vacancy rate. This is the amount of time that a unit remains vacant over an annual period.
2. Economic vacancy rate. This is the total amount of rent lost due to the property being vacant in relation to the total gross potential rent for the property. This is often a useful statistic to pull out because it gives you a vacancy rate based on income rather than a period of time.
3. And the market average. This is the average vacancy rate by property type compared to the industry standard. This will help you understand if your property is under or overachieving.

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Vacancy rate vs occupancy rate (key differences)

The main difference between occupancy and vacancy are:

• Occupancy rate measures the proportion of your units that are currently rented

• Vacancy rate measures the proportion that aren't. They always sum to 100%.

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What factors impact vacancy rates?

Several factors affect vacancy rates in rental properties:

1. Rental Pricing: If the asking rent is higher than the fair market rent, vacancy may increase because the property takes longer to rent compared to similar properties with more reasonable rent amount. 
2. Turnover Time: Extended periods between one tenant moving out and another moving in, often due to longer-than-expected repairs, can also lead to higher vacancy rates.
3. Major Renovations: While major updates can temporarily increase vacancy, any subsequent rent increases due to improvements may offset the income lost during the renovation period.
4. Location Desirability: Properties in less desirable areas may be harder to rent or experience higher tenant turnover, resulting in more days vacant compared to the market norm.
5. Seasonality: Vacancy rates can fluctuate seasonally. For example, rental properties in college towns may experience higher vacancy rates during summer months when students are away.
6. Evictions: Evictions are one of the most expensive drivers of vacancy. The legal process alone can take 30-120 days depending on your state, during which the unit may be effectively non-earning. Strong tenancy screening can help reduce this.

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How do you calculate vacancy rate for rental property?

You can calculate your vacancy rate in one of two ways.

• on a per unit basis, showing the percentage of time each unit remains unoccupied in any one year.
• as the current vacancy rate of your portfolio as a whole.

The vacancy rate formula is

• Vacancy Rate = Number of Days Vacant / Number of Rentable Days

How to Calculate Vacancy Rate Examples

Single-Family Vacancy Rate

If a single-family home is vacant for 3 weeks between tenants, the vacancy rate would be calculated as follows:

Vacancy Rate = 21 days vacant/ 365 rentable days = 0.057 or 5.7%

Multifamily Vacancy Rate

For a 4-unit multifamily property, vacancy rates can be calculated per unit or for the entire property. Here's the calculation per unit:

• Unit 1: 5 days vacant / 365 rentable days = 1.4% 
• Unit 2: 15 days vacant / 365 rentable days = 4.1%
• Unit 3: 25 days vacant / 365 rentable days = 6.8%
• Unit 4: 40 days vacant / 365 rentable days = 11.0%

The average vacancy rate for the property can also be calculated as:

Average Vacancy Rate = 85 total vacant days / 1,460 rentable days (365 days × 4 units) = 5.8 

Calculating vacancy rates on an aggregate basis provides a high-level view of property occupancy. However, examining per-unit vacancy rates is valuable for identifying specific issues, such as the need for updates or rent adjustments for a particular unit.

Portfolio Vacancy Rate

To calculate the vacancy rate for a rental property portfolio comprising one 4-unit multifamily property and three single-family properties:

• Multifamily Property:
  • Unit 1: 5 days vacant / 365 rentable days=1.4%
  • Unit 2: 15 days vacant / 365 rentable days=4.1%
  • Unit 3: 25 days vacant / 365 rentable days=6.8%
  • Unit 4: 40 days vacant / 365 rentable days=11.0%
• Single-Family Residences (SFR):
  • SFR 1: 0 days vacant / 365 rentable days=0%
  • SFR 2: 30 days vacant / 365 rentable days=8.2%
  • SFR 3: 45 days vacant / 365 rentable days=12.3%

The average portfolio vacancy rate is: Average Portfolio Vacancy Rate = 6.8%

This rate helps investors understand potential rental income lost due to vacancies. If we take the example above and say it has portfolio with a gross potential rental income of $1,500 per month per unit, then we can calculate the total lost revenue due vacancies like this:

Gross Potential Rental Income = 7 units × $1,500 per month × 12 months = $126,000 

Vacancy Expense= 6.8% × $126,000 = $8,568

Effective Gross Rental Income = $126,000 gross potential rental income − $8,568 vacancy expense = $117,432

What’s the average vacancy rate for a property?

According to Landlord Studio’s data which amalgamates over 50,000 properties across the US, the average number of properties that were vacant at any one time fluctuated between 6% and 7% in 2023.

According to a US Census Bureau, which conducts a survey on residential vacancy each year, in Q1 of 2024, the average vacancy rate for residential properties was 6.6%. 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.

Related: How Much Does Rental Turnover Actually Cost?

6 ways to reduce your vacancy rate

As mentioned above, various things can increase your rental property vacancy rate.

Areas with larger economic growth typically have more demand for rentals and make better locations for investment. However, there isn’t much that you can do if this is the reason for your vacancies other than looking at alternative locations to invest.

However, there are some factors you can control, such as how you manage your properties, the systems you have in place, and the tools that you use. 

1. Streamlined rental applications and tenant screening

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

• Sign annual leases during peak seasons, between May and August, so you can command higher rent rates and fill vacancies faster.
• Communicate with your tenant well in advance of the lease expiry date to either renew the lease or allow you to start advertising your rental.
• Create rental listings on all the top sites including Zillow, Zumper, Facebook Marketplace, Craigslist, and more.
• Use property management software like Landlord Studio to create and syndicate listings, collect applications, and run screening reports.

2. Ensure good tenant relations

Once you’ve secured an awesome tenant you want to make sure the moving-in process goes off without a hitch.

Sending through a detailed welcome letter that outlines the key things your tenant needs to know about the house is a great start.

Following that, something that often yields great ROI is leaving a welcome package for your tenants upon move-in.

3. Stay on top of maintenance

Dilapidated, dated, or shabby properties are less desirable. Nobody wants a kitchen that looks like it came out of a 1960s catalog. On top of this, if something breaks and you never fix it, this could cause friction between you and your tenants and lead them to want to move out sooner.

A poorly maintained property then, could actually cost you more money than the cost of regular maintenance.

Related: What is Property Maintenance and What Do Landlords Need to Know?

4. Charge the right amount of rent

Make sure that your rent is competitive. 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. But, if you charge too little you're leaving money on the table and could find your profits don't match your expectations.

Related: Setting Rent: How Much Should I Charge for Rent?

5. Collect rent online

Missed and late rent payments are the leading cause of evictions in the US. Collecting rent online with a purpose-built rent collection tool, like Landlord Studio, is more convenient for both parties and more secure.

With Landlord Studio your tenants can set up automatic payments to ensure they never forget to pay again. Payments are made directly into your bank account Additionally, landlords can collect deposits and tenant payable expenses and tenants can view historic and upcoming payments via the tenant portal.

Related: The Best Way to Collect Rent Payments From Your Tenants

6. Improve your property

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. Can you modernize the kitchen and bathroom? Replace old and worn-out carpets? Can install new appliances, offer tenants storage space in the basement, or provide parking?

Making even minor improvements to the amenities offered could have a big impact on the overall desirability of your property.

Related: Rental Property Accounting 101: Capital Improvements vs. Repairs

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Final Words: How To Calculate and Reduce Vacancy Rates

The rental property vacancy rate is one of the most important metrics for real estate investors to understand. It can highlight issues with a potential investment and indicate that you need to change your management style or reduce rents.

The easiest way to stay on top of vacancy rates is to use a tool like Landlord Studio. 

Landlord Studio provides up-to-date data on your portfolio’s performance metrics, including vacancy rate, as well as providing all the tools you need to increase your portfolio’s performance.

Find and screen tenants, manage maintenance requests, collect rent online, track leases and store important documents, and even manage your rental property finances. 

Fill vacancies fast, keep tenants happy, and increase your portfolio ROI. Create your free Landlord Studio account today. 

Understand Real Estate Metrics

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• What Is NOI In Real Estate Investing And Why Does It Matter?
• Optimizing Your Cashflow As A Landlord
• What Is Cash-on-Cash Return In Real Estate And Why Does It Matter?
• Cash-on-Cash Return vs Cap Rate for Your Rental Property Investment
• What is Gross Rent Multiplier and How to Calculate it?
• Operating Expense Ratio (OER)