Real estate vacancy rate is the percentage of all units in one rental property that are unoccupied during a particular time. Vacancy rate is calculated by multiplying the number of vacant units by 100 and then dividing that by the total number of units in the building. The U.S. average vacancy rate is 7 percent.
What Vacancy Rate Is in Real Estate
Real estate vacancy rates are used as an indicator to see how the property is performing overall when compared to the average vacancy rates in the area. Vacancy rental rates are also used on a broader scale to show market conditions in a particular area.
Typically, high vacancy rates are regarded as negative and may indicate job loss and economic downturn in an area, and the opposite is true as well. High vacancy rates can also be an indication that the property is outdated, needs repairs or is in an undesirable location.
Low vacancy rates usually are regarded as positive and an indicator that people want to live in that building or that particular area. What’s considered a low vacancy rate varies by area and property type, but typically a vacancy rate under 4 percent is low, and a vacancy rate over 7 percent is high.
Vacancy rate represents units that are vacant and ready to be rented. This can include a combination of units that have been recently vacated by tenants, units that have been repaired or updated and are move-in ready, and units and are in need of repairs and not yet ready.
Vacancy rate also represents units that tenants just moved out of and units that are in need of repairs and are not yet rent-ready. However, some investors don’t count units that will take more than a month to repair because it skews the vacancy rate. The vacancy rate is a parameter that shows how many units are available at any given time, which is the opposite of the occupancy rate.
Sometimes, investors don’t know how to set the rent price for a property and it’s too high so units stay vacant longer. The opposite is often overlooked, but is true too. If the vacancy rate is constantly at zero, then typically rents are too low and need to be raised in order to increase cash flow. Other times, the area is to blame and has a high crime rate, low school ratings, or high unemployment rates, all of which can drive vacancy rates up.
When to Use the Rental Vacancy Rate in Real Estate Investing
Investors use the vacancy rate as a tool to compare to other properties of the same class. Although you can use the rental vacancy rate for a single family property, it’s not as common as using it for multifamily properties and commercial real estate.
For example, an investor may analyze two apartment buildings and one has a vacancy rate of 9 percent and the other has a vacancy rate of 13 percent. All other things being equal, she may choose to purchase the property with the lower vacancy rate because it typically means less time finding tenants and more cash flow coming in immediately.
Typically you should use the vacancy rate for the following types of properties:
- Apartment Building
- Duplex, Triplex or Quadruplex
- Vacation Rental Property
- Short-Term Rental Property
- Commercial Real Estate
Vacancy rate should be used per property, and it can help an investor decide if they want to purchase a property, keep a property, and if the rents are too high or too low. They can also compare their properties to other similar properties in the area to see how they’re performing.
“Vacancy rate is important when trying to analyze potential investment properties. If you are looking to buy an apartment building, for example, you can use the vacancy rate to estimate how many units you would expect to be vacant at any given time. This will give you a more accurate estimate of the potential Net Operating Income (NOI).”
– Cornelius Charles, Co-Owner, Dream Home Property Solutions
Vacancy rates are especially helpful for new investors who aren’t sure if they should purchase a property and what they should pay for it. By knowing vacancy rates of comparable properties, they can see how well the subject property is performing, and in turn decide if it’s a good deal.
“New investors should especially pay attention to vacancy rates when purchasing rental properties. If the numbers don’t work out to where your rental income is funding the vacancy, repairs, upgrades, and property management then move on to the next one.”
– Shawn Breyer, Owner, Breyer Home Buyers
Vacancy rates are typically used to help calculate other rental property metrics, including:
- Net Operating Income (NOI): This is your potential rental income plus any additional property-related income minus vacancy losses minus total operating expenses.
- Cap Rate: This is the net operating income divided by the current property value; you use the vacancy rate to help determine the NOI.
- Cash Flow: The amount of profit the property is making after its expenses; to figure out cash flow, you use the NOI, which incorporates the vacancy rate.
- Return on Investment (ROI): This is the annual return divided by the total amount of the investment; vacancy rate factors into the NOI, which is used to calculate the annual return.
- Occupancy Rate: This is the opposite of the vacancy rate, and when added together, the two should equal 100. To calculate the occupancy rate, you divide the number of occupied units into the total number of units available and then you multiply that number by 100.
- Rental Market Analysis: This helps investors assess the rental potential of an area by analyzing the average vacancy rates, price per square foot of the comparable properties, and adjusting the rental price for the available amenities.
Vacancy Rate Formula
You can determine an accurate vacancy rate by using the below formula:
Vacancy Rate Formula = # of Vacant Units x 100 / Total # of Units
Let’s take a look at an example of how to calculate the vacancy rate using the vacancy rate formula:
Let’s assume that we have an apartment building with 80 total units, and that 12 of the units are unoccupied. Then let’s assume that the average vacancy rate for apartment buildings in the area is 5 percent. Let’s see how this apartment building compares.
First, we multiply the number of vacant units by 100:
12 x 100 = 1,200
Next we divide that number by the total number of units in the building:
1,200 / 80 = 15% vacancy rate
This 15 percent vacancy rate is three times higher than the average vacancy rate for apartment buildings in that area, so that shows us that the building is not properly performing. The next step would be to find out 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.
As you can see from this example, it’s important to know how to calculate the vacancy rate so you can also use it as a metric to analyze a property. It can show how the property is performing currently, and you can look at past vacancy rates over the years to see how the property previously performed. Then you can look at if vacancy rates increased, figure out why, and decide if the property is a good deal.
Vacancy Rate Average
The average vacancy rate for rental properties is 7 percent in 2018. This is the same as the average vacancy rate for 2017. A good vacancy rate is typically 2 percent to 4 percent in a metropolitan area, and typically higher in a more rural area. However, keep in mind that vacancy rates vary among types of properties and different parts of the country, and they even vary in different areas of cities. You can typically find the vacancy rate in your area by using census date as seen here.
For example, in the first quarter of 2018, the vacancy rate for properties in Alabama was 13.1 percent, which is almost double that of the national average. In contrast, the vacancy rate in California was 4.5 percent, which is much lower than the national average vacancy rate. Generally, this means that more people are renting properties in California than Alabama. Other factors that affect average rental vacancy rates are jobs in the area, amenities, attractions, cost of living, climate, etc.
Average Vacancy Rates per State 2018
Specifically average vacancy rates for the following types of properties are:
Multifamily Property: Typically two to five+ units, 5.5 percent
Apartment Building: Typically five+ units, 4.7 percent
Single Family Property: A property with one unit that is not a condo, 5 percent
Vacation Rental Property: A property used by the owners and rented when not in use, 45 percent
Short-Term Rental Property: A property rented on a short-term basis through companies such as Airbnb, 30 percent
Commercial Building: A property used for business purposes, 18 percent
Some creative ways to fill your commercial property vacancies include allowing short-term rentals and rentals that generate publicity, which can lead to more rentals, thus reducing your vacancy rate in the future.
“Short-term rentals add value to a location and should not be overlooked. It helps consumer confidence and ensures the idea of the space being desirable. What better way to advertise a listing than having Netflix film or Kylie Jenner’s latest pop-up store in your empty commercial space?”
– Jae Davis, CEO & Founder, Uscout
Keep in mind that when you compare vacancy rates, you want to compare apples to apples, so you compare properties in the same class, such as multifamily properties with other multifamily buildings. This gives you a more accurate reading of average vacancy rates because as you can see from the above data, the rental vacancy rates vary greatly amongst different types of properties.
Tips on How to Decrease the Vacancy Rate
Typically, the lower your vacancy rate, the better your property is performing, so you want to decrease your vacancy rate when possible. Let’s go over a few tips on how to decrease your vacancy rate.
“You can decrease your vacancy rate by being efficient at turning over units and having desirable, updated units in move-in-ready condition. This will typically make the units rent faster, thus decreasing your vacancy rate.”
– Domenick Tiziano, Blogger, Accidental Rental
Some other tips on how to decrease vacancy rates include:
- Make Timely Repairs: So tenants want to stay and refer other tenants to move in
- Screen Tenants Properly: This should lead to less turnover and less chance of non-payment of rent
- Curb Appeal: Make the property appealing so it photographs well and attracts renters
- Offer Amenities: If possible, offer onsite conveniences such as parking and laundry, which will help attract more tenants and potentially increase rental prices
- Advertise Your Property: Potential tenants won’t know about vacancies unless they see signs, online ads, etc.
Rental Vacancy Rate Frequently Asked Questions (FAQs)
Below, we are going to answer some of the most frequently asked questions about the rental vacancy rate and how to calculate vacancy rate.
What Is a Good Vacancy Rate?
A good vacancy rate varies depending on a variety of factors, including the type of property and its location. Typically, commercial properties have higher vacancy rates than residential properties because they take longer to rent, have higher rents, and require build-outs for different business specifications. However, the national average vacancy rate is 7 percent, so anything less than 7 percent is considered better than average. Most investors in metropolitan areas look for vacancy rates of 2 percent to 4 percent, which is considered good.
What Is an Occupancy Rate in Real Estate?
An occupancy rate is the opposite of a vacancy rate. You calculate the occupancy rate by dividing the number of occupied units into the total number of units available and then you multiply that number by 100. The occupancy rate, like the vacancy rate, can be an indicator of how well your property is doing. The higher the occupancy rate, the better. Typically, occupancy rates average 93 percent or higher.
How to Calculate Vacancy Rate if You Know the Occupancy Rate?
The occupancy rate plus the vacancy rate should equal 100. If you know the occupancy rate, subtract it from 100 to calculate vacancy rate. For example, if the occupancy rate is 92 percent, subtract 92 from 100 and get 8, which is the vacancy rate. You now know that 8 percent of your units are vacant.
How Can Vacancy Rates Negatively Affect You if You Go Above the National Average?
Typically, you want your vacancy rates as low as possible. If you go above the average vacancy rate, your property may be in trouble. You could be charging too much for an apartment so the units are vacant, the property may need repairs, or you may need to increase your marketing efforts.
High vacancy rates can negatively affect both your cash flow and the return on investment (ROI). If your rental vacancy rate is too high, you may be cash flow negative or may even go into foreclosure if you can’t afford to pay the mortgage payments.
The vacancy rate in real estate is the percentage of all units in a rental property that are vacant during a particular time. You calculate the vacancy rate by taking the number of vacant units, multiplying by 100, and dividing by the total number of units in the building. The U.S. average vacancy rate is 7 percent. The vacancy rate is the opposite of the occupancy rate.