One of the mistakes that investors make is not calculating the vacancy rate of their real estate investments. They think that their units will never be vacant, but the reality is that all rental units will inevitably be vacant at one point – even if they’re being managed by a property management firm.
It is vital to calculate the vacancy rate as it helps you evaluate the potential of a particular property. If the vacancy rate isn’t impressive, you may want to move on from that investment, as it can impact the property’s return. As an investor, you shouldn’t have properties that sit vacant for extended periods. It is imperative that you maintain its occupancy.
This post will provide an overview of vacancy rates and will cover how to calculate them, why they’re important, and what you can do to lower the vacancy rate.
What Is the Vacancy Rate?
In real estate, the vacancy rate refers to the amount of time a particular investment property sits vacant. By calculating this metric, you’ll be able to determine the amount of income that you’ll probably lose due to the unoccupied property. It also reflects the demand for rental properties in that particular area, as low vacancy rates indicate that people would rather rent than own.
What Factors Affect the Vacancy Rate?
Several factors affect the vacancy rate:
- Rental Rate. If the price of a particular property is more than the average rent, it’s impossible for the vacancy rate to be low, as renters would rather rent a lower-priced property. That’s precisely why you should partner with a property management company that can help you set a fair rental rate.
- Period Between Move-in and Move-Out. If you have to conduct repairs during the period where the property sits vacant prior to move-in, don’t take too long. Your goal should be to rent it out again as soon as possible.
- Repairs and Renovations. Improvements mean you’ll have a vacant property for an indefinite period. If you have to improve the property, at least opt for the improvements that increase the value of the investment. That way, you can offset the income that you lost.
- Is your rental property in a desirable location? It’ll be harder to rent it out if it’s in a bad area, so be sure to ask your investment property manager to check its crime rate and distance to various modes of transportation.
How to Calculate the Vacancy Rate of Residential Rental Properties
For single-family homes, get the amount of time that the home sat vacant over one rental period. Then, divide the number by the amount of time that the property could have been occupied over that period. For example, if the property was vacant for 14 days over 365 “rentable” days, then the vacancy rate would be 3.8 percent.
Multi-family properties are real estate investments that have more than one rental unit. It is based on the number of vacant units at any given time. Multiply the number of vacant units by 100, and then divide the amount by the total number of units.
For instance, if there are 4 vacant units in a 14-unit apartment, multiply 4 x 100 to get 400. Then, divide it by 14 units to arrive at a vacancy rate of 28.57 percent.
Alternatively, you could calculate the vacancy rate per individual unit. Let’s take a look at this example:
- Unit 1: 5 days vacant, 365 rentable days = 1.37 percent
- Unit 2: 15 days vacant, 365 rentable days = 4.11 percent
- Unit 3: 7 days vacant: 365 rentable days = 1.92 percent
Get the average vacancy rate by adding the vacancy rate for every unit. Then, divide it by the number of units. So, the average vacancy rate would be about 2.47 percent.
You could also add the number of days that the units sat vacantly, and then divide it by the total number of rentable days. If you go for that calculation, it would look something like this:
(5 + 15 + 7) / (365 + 365 + 365) = 2.47 percent.
What Is the Ideal Vacancy Rate?
Based on numbers from the Federal Reserve, the vacancy rate in the United States is 6.8 percent. However, bear in mind that this number can vary, as it depends on numerous area-specific factors. To get an accurate calculation of your location’s average vacancy rate, consult a property management agent.
How to Lower Your Vacancy Rate
If your residential rental property has a low vacancy rate, that shows you that it performs well. However, if you’re struggling to lower your vacancy rate, here are our property managers’ suggestions:
- Keep your tenants happy. Your tenants will be less likely to leave if they know that you truly care about them. Therefore, make sure to respond to your tenants’ complaints, concerns, etc. ASAP. Or, hire a South Florida property management agent that can handle tenant-related matters for you.
- Offer attractive features. From an in-unit washer and dryer to free WiFi, there are several features you can provide to make your property more attractive. Bear in mind that you may have to raise your rent, so this plan can also backfire as your tenants may not want to pay a premium for your amenities.
- Provide incentives for tenants who renew. Don’t want your tenants to move out? Consider providing incentives such as free rent for a month, or a discount on a year-long lease. You could also offer free property upgrades of their choice to encourage them to renew (e.g. new bedroom, remodeled bathroom, etc.)
Is Your Property Profitable?
To accurately calculate the vacancy rate of your real estate investment, enlist the services of the experts at Luxury Property Care. We’ve served the South Florida real estate market for years. Our experience has led us to gain insights into the market, including the rental demands, cap rate, cash flow, rate of return, and more important metrics.