A vacancy rate defines the percentage of unoccupied units in a multiunit rental property. It is a valuable metric that helps determine whether a rental property is performing well and if it will be a profitable investment. To learn more about what a vacancy rate is, we’ll use a vacancy rate calculator and discuss why it matters to investors, how to decrease vacancies, and vacancy rates statistics in the US.
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How to Calculate Vacancy Rate
To calculate your property’s vacancy rate, these are the two numbers you’ll need to gather: the total number of units in the building and the number of currently vacant units in the same building. If you already own the property, review your ledger to find these numbers. If you’re evaluating a new property purchase, have your real estate agent gather this information from the current owner or do your own research online.
Learn how to calculate the vacancy rate using the formula below or by inputting your figures into the calculator:
In an apartment building with 80 total units, 12 of the units are currently unoccupied. Using the vacancy rate calculator formula, we first multiply the number of vacant units by 100.
(12 Vacant Units X 100) ➗80 total units = 15% vacancy rate
In the example above, the average calculation for the vacant rental property is 15%. If the average vacancy rate for the area is 5%, it’s clear that the building is not performing properly. The next step is to determine why the vacancy rate is so high. It may be because the apartments are overpriced, outdated, need repairs, or the building is unattractive and lacks amenities.
Pro tip: When you are figuring out the number of vacant units, many investors exclude units tenants just moved out of, units in need of repairs, or a unit that has just been updated and placed on the market because these factors skew the data. Make sure to carefully consider which units are included when you determine or receive the vacancy rate of a rental property.
What Defines a Good or Bad Vacancy Rate?
What’s considered to be a “good vacancy rate” is highly relative to each property’s location, rental market, economy, season, and price. Most investors consider between 2%-4% a good vacancy rate in metropolitan areas. Rural areas tend to have higher vacancy rates across the board, with a current average rental vacancy rate of 6.7%. In general, high or “bad” vacancy rates mean that a property is not performing well, and may indicate poor property condition, poor management, or local problems like job loss and economic downturn.
In contrast, low or “good” vacancy rates are generally considered an indicator that people want to live in the building or unit and that there is a strong demand for rentals. However, low vacancy rates can also be overlooked as an indicator of a potential problem. If the vacancy rate is constantly at zero, then it’s likely that the rent price is too low and must be raised to increase cash flow. Investors must know how to set the rent price for a property to maximize cash flow and minimize vacancies.
Why Vacancy Rates are Important to Investors
Vacancy rates are typically used to help landlords or investors evaluate whether a potential rental property purchase will be profitable. However, it is also an important metric to evaluate the rental market across a neighborhood, city, state, or country. When you perform a rental market analysis (RMA), you’ll gather and compare information about multiple rental properties throughout an area to comprehensively evaluate the overall rental market.
Real estate vacancy rates indicate how a rental property is performing, especially when compared to average vacancy rates in comparable properties. This is critical information for investors to make the best financial decisions. For example, a duplex with a vacancy rate of 4% may appear to be performing well. However, if the average vacancy rate for the area is only 1.5%, the property should be more closely evaluated to find potential problems.
Vacancy rates can also help investors determine whether or not the property is a profitable purchase, but they shouldn’t be the sole determining factor. Some of the most common factors that impact vacancy rates include:
- Rental listing marketing
- Condition of the property
- Property management style
- Rental pricing
- Rental market demand
In many cases, determining the factors contributing to the rental vacancy rates will help you learn more valuable information than the general vacancy calculation. For example, if a rental property is in a location with high demand for rentals and has a competitive rent price, a high vacancy rate would expose a potential problem with the property, like a need for repairs or updates.
On the other hand, if the property is in good condition, in a strong rental market, and managed successfully, the problem could be as simple as marketing the listing. Vacancy rates are incredibly important for investors, but should always be taken into consideration along with other factors and property metrics.
How the Vacancy Rate Formula Affects Other Real Estate Metrics
Vacancy rates play a crucial role in all the necessary rental property calculations. Knowing how many vacancies there are will help investors accurately calculate the property’s rental income and long-term return on investment (ROI).
Vacancy rates are used to calculate rental property metrics like:
- Net operating income (NOI): This is the total potential income of a rental property after all income, expenses, and losses from vacancies are taken into account. Learn how to calculate NOI in our article about buying apartment complexes.
- Cap rate: This shows the rate of return for the property over time, including losses from vacancies.
- Cash flow: The amount of profit the property makes after all expenses each month.
- Return on investment (ROI): This is a percentage that reflects the amount of profit investors are generating on a property on an annual basis.
- Occupancy rate: This is the opposite of the vacancy rate, and shows how many units within a rental property are occupied and generating income.
- Rental market analysis (RMA): This provides an overall assessment of an area’s rental potential, including average vacancy rates, price per square foot of comparable properties, and rental price adjustments.
- Gross rent multiplier (GRM): This calculation determines how many years or months it will take to earn back your investment in the property, which depends on accurate vacancy rates.
How to Avoid High Vacancy Rates
Vacancies are inevitable for everyone who invests in real estate, but it becomes a big problem if units remain unoccupied for weeks or months at a time. Fortunately, it’s relatively easy to learn how to efficiently turn over rental units and prevent units from long-term vacancies.
The best ways to decrease vacancy rates are:
- Thoroughly screen new tenants: Choosing good quality tenants who care for the property will help you foster long-term relationships, minimize vacancies, and cause less intensive repair and maintenance costs.
- Improve curb appeal: Whether you have an apartment complex or single-family rentals, making them look clean and appealing will significantly impact your ability to attract and keep good tenants.
- Offer amenities: When possible, offer on-site conveniences like parking, laundry, a fitness center, or security. These will help attract more tenants and potentially allow you to increase rental prices.
- Establish an efficient communication system: Make sure tenants can easily communicate with the landlord, property manager, and maintenance member when necessary. This improves the tenants’ experience and builds trust, which helps keep them motivated to take care of the property. It also helps you stay on top of maintenance requests.
- Consistently maintain properties: By maintaining properties on an ongoing basis, you won’t have to designate time to make repairs and updates when tenants move out. This should include preventative care like changing air filters, pest control, and checking smoke detectors. Use a property maintenance checklist to track these tasks.
- Promote and advertise your rental: Renters can’t apply for your property if they don’t know it’s available. Learn how to market your rental listings effectively so that you can start gathering applications as soon as your previous tenants move out.
Pro tip: For commercial properties or rentals in highly seasonal markets (i.e., towns with college students or vacation areas), another way to offset high vacancy rates is with short-term rental agreements. Month-to-month rental agreements are useful for short- and mid-term tenants and are often ideal for investors to continue generating rental income while selling the property. On the other hand, using the space as a vacation rental can generate income even on a weekly basis.
Average Vacancy Rate Statistics 2022
The national average vacancy rate in 2022 is 5.6%, and has declined by 9.68% in the last 12 months. This shows that vacancies across the country are higher than most investors would prefer, but that the demand for rental properties overall is increasing significantly.
While knowing the average in the US is helpful, landlords also need to know the vacancy rates in their specific location and the factors that affect the vacancy rates in their area. This will give landlords a better understanding of how their property or potential property stacks up against the competition. Take a look at the state map below to see vacancy rates in your state. Also, there are a few current examples of how vacancy range can be drastically different according to different locations and criteria:
- In the first quarter of 2021, vacancy rates in Buffalo, New York, were 14%, but by the end of the third quarter, they plummeted to 1.1%.
- In 2022, the Sacramento area had an average vacancy rate of only 0.9%, while rates in Toledo, Ohio, at the same time, were 13.6%.
- The average vacancy rate in New York City has decreased by 40.7% in the last 12 months
- The average vacancy rate for apartments with 10 or more units is currently 7.3%, while one-bedroom apartments have the highest vacancy rate of all property types at 22.8%.
- Rental properties with prices of $300 or less per month have a vacancy rate of only 1.5%, while properties costing over $2,000 per month have a vacancy rate of 8.4%
A vacancy rate reflects how many unoccupied units are in a rental property, which is key to helping investors calculate potential profits and identify property weaknesses. Average vacancy rates vary wildly depending on a variety of factors, so this important metric should be just one piece of your rental property evaluation. An investor with a thorough understanding of the rental market can take a property with high vacancy rates and learn how to find good quality tenants, keep the units occupied, and maximize cash flow.