What is the Typical Vacancy Rate for Rental Property

When it comes to real estate investments, one of the most overlooked metrics is the vacancy rate. This can provide a good insight into the property’s profitability and the market’s suitability for a real estate investment. So, what is the typical vacancy rate for rental property? Continue reading to find out!

Key Takeaways

• The vacancy rate is a performance indicator that measures how often a property sits empty and can be used to analyze the profitability of rental investments.
• The typical vacancy rate of rental property in the US is at 7.2%, well within the industry-accepted 5% to 8% healthy vacancy rate.
• Vacancy rates are influenced by several factors, including rental pricing, marketing quality, resident experience, and more.

What Is a Vacancy Rate in Real Estate?

In our experience in Atlanta property management, we know that the vacancy rate is one of the underappreciated performance indicators that investors need to look at. But what is it exactly? At first glance, vacancy rates refer to the percentage of time a rental property or unit sits vacant. However, from an investor’s standpoint, the vacancy rate measures the proportion of rentable time or units that remain unoccupied and therefore generate no rental income.

In the rental property business, vacancy rates are also looked at in two ways – physical vacancy and economic vacancy. Physical vacancy rates account for the number of units that are physically vacant, which means that no one is currently renting or leasing them. On the other hand, economic vacancy refers to circumstances where a rental property is experiencing income loss, even if it is leased, due to concessions, rent non-payment, and the like. Here, we can see the role that vacancy rates play in analyzing investment opportunities, as they have a direct impact on the property’s cash flow, rental yield, and associated risks.

What Is the Typical Vacancy Rate for Rental Properties

So, what is the typical vacancy rate for rental property? According to the latest U.S. Census Bureau housing data, the average vacancy rate in the US is 7.2%. While this is a slight increase from last year’s 6.9%, this is still within the acceptable range of 5% to 8%, which is considered a good vacancy. Many analysts consider a vacancy rate between 5% and 8% balanced, though ideal ranges vary by market and property type.

However, there’s so much to this that an investor should know. First, vacancy rates vary depending on location, specifically, national averages and local market rates. On top of that, average vacancies can fluctuate due to several external factors, from property type to affordability levels and population growth.

What Factors Impact Vacancy Rates?

As an investor, one of the most important steps you need to take is to understand the typical vacancy rate for rental property and the different factors that influence it. This includes location, pricing, retention strategies, market conditions, and more. Let me explain.

As mentioned earlier, vacancy rates can differ dramatically depending on location. But instead of looking at the national and state averages, you can further look at vacancy rates in local markets. For example, vacancy rates can differ in Atlanta’s city center compared to surrounding suburban communities due to differences in housing supply, pricing levels, and employment accessibility. This is in the same way that vacancy rates can fluctuate from one neighborhood to another. This all boils down to demand dynamics and overall market trends, while ensuring all leasing practices comply with Fair Housing laws and are applied consistently to all applicants.

Aside from this, there’s also your rental pricing strategy. If you don’t know how to price your rental property competitively, you put yourself at risk of long-term vacancies. In the same way, ineffective tenant retention and renewal techniques can lead to more frequent property downtime.

The same goes when it comes to your management practices and property condition. First, if your operations lack structure, efficiency, or are simply inefficient, it can extend vacancy times between tenants. Similarly, if the property is not move-in ready, outdated, or poorly maintained, it may reduce overall market competitiveness and increase vacancy time.

Then, there are external market conditions that can also drive vacancy rates up and down. For example, job growth can lower vacancies, but layoffs may do the opposite. At the same time, population migration trends, new constructions, and interest rate changes can affect the typical vacancy rate for rental property.

How to Calculate Vacancy Rate

This brings us to an equally important question, which is “How do you calculate vacancy rates accurately?” Well, the formula goes like this:

Vacancy Rate = (Total Days Vacant/Total Available Rental Days) x 100

Let’s say that you’re looking at a single-family residential. Over the past year, the property was vacant for 40 days, in between tenants. Taking this into consideration, the vacancy rate is calculated by:

Vacancy Rate = (40/365) x 100 = 10.9%

But what if you’re looking at a multifamily property, such as an apartment complex? Then, the formula now looks at the property’s unit-days, which is an accumulation of all vacant and rentable days of all units. Let’s say that you have a 10-unit apartment complex, and throughout the year it experienced a total of 240 vacant unit-days. As for the total rentable days, you simply need to multiply the number of rentable days (365) by the total number of units in your property (10). Taking these into consideration, the vacancy rate is:

Vacancy Rate = (240/3,650) x 100 = 6.6%

From calculating the vacancy rate of an investment property, you can come up with realistic income projections and create a more grounded cash flow forecast. On top of that, you can also use the vacancy rate calculation to conduct a value-based evaluation of the property using its net operating income (NOI). More importantly, the vacancy rate allows you to compare rental property comps with one another, giving you the chance to identify the more profitable opportunity.

Partner with Bay Property Management On your Next Real Estate Investment

As an investor, one of the most powerful tools that you can use in analyzing and comparing investment opportunities is the vacancy rate. By understanding the typical vacancy rate for rental property, you’ll gain insight into its profit potential, cash flow performance, and long-term value.

Now, if you’re looking to lower the vacancy rate of your investment property, partnering with a professional property management company is the solution. Our team of expert property managers can provide critical support – from efficiently screening tenants to enhancing pricing strategies and developing an effective retention program. Interested? Contact us today to learn more!