What Is a Vacancy Rate?

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Understanding how to effectively measure vacancy rates is a crucial skill for real estate investors aiming to optimize the value and profitability of their rental property. This indicator plays a significant role in determining net operating income (NOI), return on investment (ROI), and overall property value. In this article, we will explore the concept of vacancy rates, historical occupancy rate trends in the US, different methods to calculate vacancy and provide investor advice on maintaining low vacancy rates.

So, what exactly is a vacancy rate? The vacancy rate is a key measure in real estate investment that represents the percentage of time a building or portfolio of buildings remains unoccupied by tenants. By monitoring vacancy rates and comparing them with similar properties in the local market, investors, realtors, and property management teams can identify strategies to maximize rental returns and increase property values by avoiding high vacancy rates. This data can also help improve tenant retention rates, which significantly impact an investor’s gross profit. Additionally, analyzing the local vacancy rate provides insights into current rental demand trends and shifts in supply-demand dynamics.

By understanding these fluctuations, investors can ensure they fully capitalize on their investment opportunities.

To calculate the vacancy rate using the ‘days of vacancy’ method:

  1. Add up the number of days the property remains vacant within a year (365 days).
  2. Divide the total vacant days by 365 to get the mean percentage, representing the vacancy rate.
  3. For example, if a property is vacant for 10 days in a year, the vacancy rate would be calculated as follows: 10 / 365 = 2.7%.

Calculating the vacancy rate becomes complex with multiple vacant units as each unit may have a different rate. To determine the overall vacancy rate, consider the number of days each unit remains vacant.

Example calculation for a 3-unit multifamily property:

  • Unit 1 remains vacant for 20 days.
  • Unit 2 remains vacant for 30 days.
  • Unit 3 is occupied for the entire year.

To calculate the vacancy rate:

  1. Multiply the total units by 365 to obtain the total rentable days (3 x 365 = 1095 days).
  2. Add up the total number of days each unit remained vacant in a year (20 + 30 + 0 = 50 days).
  3. Divide the total vacant days (50) by the total rentable days (1095) to get the average vacancy rate (50 / 1095 = 4.6%).

For a portfolio of rental properties, follow a similar process. Example calculation for a 10-unit portfolio consisting of 5 single-family rentals (SFRs) and 5 vacation rentals:

  1. Multiply the number of rental units by 365 to determine the total rentable days (10 x 365 = 3650 days).
  2. Sum up the total vacant days for each unit. For the SFRs, the total is 0 + 5 + 10 + 15 + 20 = 50 days. For the vacation rentals, the total is 20 + 30 + 40 + 40 + 60 = 190 days.
  3. Divide the total vacant days (240) by the total rentable days (3650) to get the average vacancy rate (6.6%).

Different property types may have varying vacancy rates. Despite potentially higher rates for vacation rentals due to seasonality, their higher charges often lead to increased income, making them an appealing investment option for maximizing returns.

When calculating the vacancy rate for a portfolio, differentiate between property types to avoid skewing the rate. Calculating at the portfolio and category levels provides valuable insights into performance.

Both methods offer valuable information about the income-generating potential of a portfolio compared to similar properties.

US Vacancy Rates Over Time

To understand typical vacancy rates for investment properties, let’s examine historical data from the US rental market. Recent information from the St. Louis Fed (Q3 2022) shows the national average rate at around 6%, the lowest since 1985. This suggests an increasing demand for rentals. Factors like lifestyle shifts, millennials and Generation Z entering the rental market, and rising homeownership costs contribute to a rise in renters and a decline in vacancy rates. The current economic landscape amplifies this trend, presenting opportunities and challenges for landlords.

Influences on Vacancy Rates

Several factors impact vacancy rates, such as location and time of year. University towns may experience higher vacancy rates during summer when students are away. Vacation rentals have higher vacancy rates during the off-peak season due to weather or other factors. Suburban single-family rentals, especially in convenient areas for remote work, may have lower vacancy rates.

Neighborhood ratings can also influence vacancy rates. Lower ratings indicate high crime rates, substandard schools, and limited amenities, or shopping options, making these neighborhoods unattractive for renters and landlords. Lack of maintenance or appealing amenities can lead to lower occupancy rates. Landlords must consider these elements and take appropriate actions to maintain property appeal.

Repercussions of Vacancies on Essential Metrics

Vacancies and tenant turnover significantly impact rental income, cash flow, and return on investment (ROI). Vacancies mean missed revenue opportunities, and vacant units may require repairs before new tenants move in, incurring additional costs. Tenant turnover escalates expenses due to fees, cleaning charges, maintenance, and repair costs.

Vacancies can depress overall ROI as carrying costs like taxes, insurance, and mortgage payments persist even without rental income. When evaluating rental property investments, investors should consider vacancy rates to understand their impact on expected returns.

To optimize profits and ensure a steady cash flow, investors should focus on strategies to reduce vacancies. This includes maintaining units, setting competitive rental prices, proactive marketing, streamlining applications, regular maintenance, and prompt resolution of issues during home visits.

Maintaining High Occupancy Levels: 5 Strategies

For real estate investors aiming to maximize returns, maintaining high occupancy levels is crucial. Vacancies lead to lost revenue while carrying costs persist. To address this, consider the following strategies:

  • Set competitive rental prices based on market rents.
  • Proactively market units through various channels.
  • Simplify the application process to expedite approvals and increase demand.
  • Regularly maintain units to demonstrate commitment to the property.
  • Conduct regular home visits to promptly address maintenance issues and reassure tenants.

By implementing these strategies, investors can keep their portfolios profitable regardless of market fluctuations.

Maximizing Real Estate Investments: Strategies for Success

Understanding the concept of vacancy rates and their impact on real estate investments can empower investors to optimize their profits while also reducing the costs associated with unoccupied properties across their portfolio. 

By analyzing historical vacancy rate patterns in a given location, implementing varied vacancy calculation methods, strategically setting prices to minimize downtime, and employing smart management tactics, real estate investors can secure robust returns on multiple rental property investments over the years. Identifying rental properties with low vacancy rates can pose a challenge, even for seasoned real estate investors. 

Dealing with uncertainties and managing properties can be daunting, this is where Foothold comes into play, equipping investors with strategies to mitigate risk and streamline processes as they seek out investment opportunities. We invite you to explore our curated selection of properties; your initial investment could potentially lead to substantial growth in the future.

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