The vacancy rate is one of the easiest metrics for real estate investors to gauge the effectiveness of a rental property. It generally measures the percentage of rental units that are vacant during a particular point in time or period, depending on the method used. This metric can help investors measure rental demand and estimate income stability. Additionally, it may also help investors identify potential problems before they impact returns.
Key Takeaways
- Vacancy rate generally measures the percentage of rental units that are unoccupied at a particular point in time or during a specific period.
- A lower vacancy rate generally means stronger rental demand, but the ideal rate varies by property type, location, and local market conditions.
- Investors should track both physical and economic vacancy because an occupied unit does not always mean the property is generating its full potential income.
What Is Vacancy Rate in Real Estate?
Vacancy rate in real estate is the percentage of rental units or available rental space that is unoccupied during a particular period. Investors commonly use it to evaluate demand, property performance, and potential rental income. For example, if an apartment building has 20 units and one unit is vacant, the property's physical vacancy rate is 5%.
Unit occupancy is only one thing the vacancy rate can reveal. A rental property that consistently experiences a higher vacancy rate than comparable properties nearby may have issues with pricing, property condition, marketing, tenant experience, or overall rental demand.
As experienced property management firms know, vacancy should be monitored adjacent to rental income, operating expenses, tenant turnover, and local market conditions. Looking at vacancy in isolation may not provide investors with the full picture of a property's financial performance.
What Is a Good Vacancy Rate?
There is no single vacancy rate that is considered good for every rental property.
Typically, less vacancy is preferred, as occupied units produce rental income for owners. Even though a very low vacancy rate usually indicates strong rental demand, consistently leasing units very quickly may also be a reason to review whether asking rents are aligned with comparable properties in the local market.
What qualifies as a healthy vacancy rate depends on factors such as:
- The local rental market
- Property type
- Neighborhood demand
- Current rental rates
- Seasonality
- Property condition and amenities
- Tenant turnover
- New housing supply in the area
Investors should compare their property's vacancy rate with similar properties in the same market rather than relying on a one-size-fits-all benchmark. For instance, in a neighborhood in which similar properties have a 2% vacancy average, a 6% rate may warrant a closer look. It may be standard, however, in a market with a higher overall vacancy. Monitoring the rate over time can be especially helpful. If the vacancy rate is consistently increasing, investors should review rental pricing, marketing, maintenance, and overall market demand.
Types of Vacancy Rates in Real Estate
Investors may encounter several different vacancy measurements. Understanding the distinction can help provide a clearer picture of property performance.
1. Physical Vacancy Rate
Physical vacancy measures how many rental units are physically unoccupied.
For example, if a property contains 50 units and five are vacant:
Physical Vacancy Rate = 5 ÷ 50 × 100 = 10%
This is the most straightforward vacancy measurement and is useful for understanding how much of a property is currently occupied.
2. Economic Vacancy Rate
Economic vacancy focuses on lost or unrealized rental income rather than simply counting empty units. Even if a property is fully occupied, it can still experience economic vacancy.
Depending on how it is calculated, factors such as vacant units, rent concessions, delinquent or uncollected rent, and other sources of lost rental revenue may contribute to economic vacancy.
For investors, economic vacancy provides a broader picture of how much income a property may have the potential to generate.
3. Market Vacancy Rate
Market vacancy rate measures the proportion of rental units that are vacant within a particular market or geographic area. Using this data, investors can ascertain the overall demand for rentals and how an individual property compares versus its competition. A property with a vacancy rate much higher than the surrounding market may deserve further inquiry.
4. Expected or Turnover Vacancy
Some level of vacancy is normal for most rental properties. Units may sit vacant between tenants while landlords complete repairs, cleaning, inspections, marketing, and the leasing process. For this reason, investors often include a reasonable vacancy assumption when projecting rental income instead of assuming 100% occupancy throughout the year.
How to Calculate Vacancy Rate Step-by-Step
Calculating the physical vacancy rate is relatively simple. The basic formula is:
Physical Vacancy Rate = Vacant Units ÷ Total Rentable Units × 100
Here is how to calculate it step by step.
Step 1: Determine the Total Number of Rental Units
Start by identifying how many rentable units are included in the property.
For example, assume an investor owns a 40-unit apartment building.
Step 2: Count the Vacant Units
Determine how many of those units are currently unoccupied.
Suppose three of the 40 units are vacant.
Step 3: Divide Vacant Units by Total Units
Divide three vacant units by 40 total units.
3 ÷ 40 = 0.075
Step 4: Multiply by 100
Convert the result into a percentage.
0.075 × 100 = 7.5%
The property's vacancy rate is therefore 7.5%.
For a single-family rental, investors may instead calculate the percentage of the year the property was vacant. For example, if the home was vacant for 30 days during a 365-day year:
30 ÷ 365 × 100 = approximately 8.2%
Looking at vacancy over several months or years can help investors distinguish temporary turnover from a more persistent occupancy issue.
Why Vacancy Rate Matters to Real Estate Investors
Vacancies directly affect rental income. Every day a rentable unit remains empty is potentially a day without rent being collected, while many property expenses continue.
Monitoring vacancy can help investors:
- Forecast rental income more accurately
- Evaluate property performance
- Compare investment opportunities
- Identify pricing or marketing problems
- Plan for tenant turnover
- Estimate cash flow more realistically
- Measure local rental demand
Vacancies should not be evaluated alone, however. Investors should consider it alongside rent collection, operating costs, maintenance expenses, tenant retention, and market rents. A property with slightly higher vacancy may still outperform another investment if it generates stronger rents, has lower expenses, or produces better overall returns.
Frequently Asked Questions
Is a high vacancy rate bad for real estate investors?
A consistently high vacancy rate can reduce rental income and may indicate problems with pricing, demand, property condition, or tenant turnover. However, investors should compare the property's vacancy rate with similar rentals in the local market before drawing conclusions.
Is zero vacancy always good?
Not necessarily. Full occupancy is generally positive, but consistently having no vacancy could sometimes indicate that rents are priced below what the market may support. Investors should evaluate occupancy together with rental rates and overall financial performance.
What is the difference between vacancy rate and occupancy rate?
At the property level, when calculated using the same units and time period, vacancy and occupancy rates generally add up to 100%.
For example, a property with a 7% vacancy rate would have a 93% occupancy rate.
How often should investors calculate vacancy rate?
Investors can monitor vacancy monthly, quarterly, and annually. Looking at longer-term trends can be particularly helpful because a single vacant unit during tenant turnover may not indicate a broader problem.
Understand Your Rental Property's Performance
Vacancy rates allow investors to easily track rental demand and understand how consistently a property is generating income. Investors should compare a property's vacancy rate with local market conditions and track its performance over time rather than relying on a single percentage.
Stone Oak Property Management assists rental property owners with leasing, tenant turnover, property maintenance, and day-to-day duties with a focus on achieving occupancy. Reach out to us for additional information about skilled property management services and ways we can help you protect your rental investment’s performance.
