How to figure if vacancy rates in your rental property are good or bad, and 3 possible reasons for high vacancy rates and tenant turnover can chip away any landlord profits.
By Justin Becker
What most independent landlords want is to avoid rental property vacancy at all costs. High vacancy rates and tenant turnover can chip away any profits a real estate investor may have earned in more lucrative years.
When you have vacant units, there are still a lot of costs to bear each month. At the same time, you have no rental income from these units to cover the cost of repairs, maintenance, applicant screening, and rental listings.
The average costs of vacant rental properties can go over a thousand dollars a month quite easily. Real estate investing might seem like a great way to earn regular income, but high vacancy rates are definitely one of its biggest risks. This is why landlords and real estate investors should focus on retaining quality, high-paying tenants for the long run.
What are vacancy rates?
We’ve talked a bit about vacancy rates now, but what actually are they?
The traditional definition of a vacancy rate was the percentage of available, vacant units in a property. More specifically, that property consisted of multiple units, such as an apartment complex or a hotel.
Today, landlords renting out single-family homes, condominiums, and other types of units also measure their progress in terms of vacancy rates. Landlords can determine the vacancy rate of their properties by looking at the conditions of the rental market in that specific area.
With information about vacancy rates, both landlords and real estate agents can determine the ratio of rental properties versus the total number of properties within that area.
With high vacancy rates, the indication might be that potential renters don’t like the area. In the case of low vacancy rates, there are probably a lot of renters looking for a space here.
Of course, the ideal situation is to have a low vacancy rate all year round. If not that, then a landlord will aim to have a high occupancy rate for as long as possible. As long as things remain fairly stable that way, real estate investors can hope to keep earning a respectable cash flow from their rental property.
Property Management Vacancy Rate
The vacancy rate of rental properties determines the rental income you get from occupied units or the rental income you lose from unoccupied units.
Real estate investors will use their vacancy rates to make predictions about how their rental property might perform in the market in the near future. A low vacancy rate means that the cash flow should be relatively stable and the market is beneficial to the landlords.
What Influences the Vacancy Rates in a Rental Property?
The vacancy rates in any specific rental property may vary according to several factors. Those concerned with property management may want to check these out:
- The rental rates listed for the rental property are higher than in the rest of the market, causing the rental-vacancy rate to go up.
- There is a long time between tenants due to extended time required for repairs.
- A lot of updating can also result in increases in vacancy rates. The increased rental income may offset that loss, though.
- If the rental property is not in a very well-developed area, it may not be the best fit for most people who want modern amenities.
- The rental property might not be in great demand due to the type of structure; a humble single-family rental is more likely to get tenants than an overwhelming mansion.
How to Calculate the Vacancy Rate of Your Rental Property
Reasonable property management includes many tasks. One of them is to carefully calculate vacancy rates regularly.
Vacancy rates are relatively easy to work out when we’re just talking about a single-family rental or single-family home. The same goes for small multifamily structures and property portfolios. The vacancy rates calculation here is applicable for any kind of rental property.
Simply put: Vacancy Rate = Number of Vacant Days / Number of Rented Days
To calculate the vacancy rate for various units, keep reading:
Single-family home vacancy rate
If a single-family house or apartment is vacant for a month out of the year, property management will divide those empty days by the number of occupied days.
Let’s say the month was 30 days. Divide 30 by the 365 days of the year. The result will be 0.084 or 8.4 percent. This is the rental vacancy rate you get with this situation.
Multifamily rental vacancy rate
If the rental property can hold around three independent units, we can calculate the vacancy rate by looking at the occupancy rate of each unit. This also means the total number of empty days divided by the rented days for each unit.
For Unit 1, there might be no vacant days at all. This will result in a zero vacancy rate.
For Unit 2, the vacant days may only add up to 10 a year. This results in a 2.7 percent vacancy rate.
For Unit 3, the rental property might stay vacant for two months. This brings its vacancy rate up to 16.4 percent.
Here, we’re assuming that every year consists of 365 days and every month consists of 30 days. If you start calculating the vacancy rates of your own rental property, the property management will be according to the year it is (leap year or not) and the number of days in each specific month.
With the three-unit rental property in the example above, the average vacancy rate is 6.37 percent. Whether this is deemed high or not will depend on the average vacancy rate in the rental market in that particular locality. Any property management company can also get the vacancy rate by dividing the vacant days number by the rentable days’ total number.
By determining the vacancy rate of a property, a landlord or other type of investor can keep an eye out for signs of trouble. If the vacancy rate goes down, they will know that a certain unit or rental property requires action.
This could be an updating project, renovation, or some much-needed repairs. If the issue still persists, there’s always the option of lowering the rent a little. In the meantime, the vacancy-rate information will help to predict the potential rental income in the coming months at least.
If you don’t have information about the rental-vacancy rate per unit, you won’t be able to pinpoint the problem areas. For instance, in the example above, if one unit out of three has a consistently high vacancy rate, this indicates something is wrong with that particular unit or area.
You might want to get some feedback from the previous tenants or launch a thorough investigation into what might be the problem. There could be a shoddy plumbing system there, a mold infestation, or something equally serious. If these issues are neglected, a high vacancy rate isn’t your only problem; infestations of mold and pests may easily spread to other units and increase your costs.
Portfolio rental vacancy rate
A rental property portfolio could have several types of properties. For example, there may be three single-family units and one 4-unit multifamily area.
Again, you can calculate the rental vacancy rate for each single-family unit separately or together. The same goes for the multifamily units. Add up all the percentages and divide by the number of properties in the portfolio.
The resulting vacancy rate will tell any investor how much they might be potentially losing out on rental income. If a unit seems to be empty for too long, you’re probably losing money on it. The gross rental income on all the rented units will need to supplement the costs for the empty units.
What are the Possible Reasons for High Vacancy Rates?
There might be several reasons and factors why your rental vacancy rates are disturbingly high. A good property management company will probably be able to tell you the correct vacancy rates for your properties. If you get a high vacancy rate back, here are some of the possible reasons to look into:
1. The rental rate is very high
Yes, a rental income might be a great way to generate cash flow, but you have to think long and hard before setting those rates.
When tenants find a unit’s rent too high, they will probably go for other, similar options in a lower range. This extends the rental vacancy into an alarmingly high rate. Plus, an overpriced rent will drive away tenants that you already have; they might simply not be able to live there anymore after the price hike.
Take a look at the comparable properties in your area and check out their rates to determine whether you’re being realistic. Alternatively, you can also join an online forum, put up photos of your property, and ask whether the rent seems too high.
2. Falling behind on maintenance requests
One of the biggest perks of renting in the United States is that the landlord is usually the one responsible for all sorts of maintenance efforts and costs. Please note that this is an expectation that your tenants will have in mind. If you don’t respond to their maintenance requests quickly and promptly, tenants may plan to leave instead of living with the daily inconveniences.
Whether it’s a leak or the smoke detector needs new batteries, it is essential that a landlord address repair issues and property maintenance. This is just part of keeping tenants happy. So, pay attention to them.
If they are quality tenants that pay their rent on time, you may even want to go the extra mile to retain them. After all, you don’t want them wondering how to move-out of an apartment anytime soon.
3. The property doesn’t measure up to its counterparts
A rental vacancy that goes on for some time may be due to the kind of property itself. If an apartment unit doesn’t give tenants the amenities and conveniences that similar options do in the same price range, you might face a high vacancy rate. Compare the number of bedrooms you offer, along with the square footage and amenities, such as walk-in closets, in-unit washer-dryers, patios, balconies, pools, and garages.
The competition might be what’s ratcheting up that rental vacancy rate, so see how they’re faring. When you get the answer, you might want to reduce the rent a bit or update the units to match the amenities of your competitors.
Should You Be Worried about Rental Vacancy Rates?
So, now you have your yearly rental vacancy rates. How does one determine whether these vacancy rates are high enough to cause alarm? Also, how do we know when the vacancy rates are low enough for us to relax a little?
At the end of the day, property owners may utilize vacancy rates as a measure of how their property management is going. However, rental vacancy is also a means of assessing the health of the rental market within the whole real estate industry.
Consider the average vacancy rate in your area: One good way to determine whether your rental vacancy rate is worrisome or not is to look at the average rate in your state or country. With that said, the vacancy rate will also vary among the property types, as well as different corners of the world. You may want to explore whether apartments are better or worse than houses with regards to vacancy rate before investing in any one property type.
A decent vacancy rate should probably lie between two to four percent. That is, if we assume the property is within a metropolitan area. Rental vacancy rates will probably be higher in rural places where the tenants might even be seasonal instead of the regular, long-term variety.
How Else Can You Determine the Rental-Vacancy Rate?
If you don’t want to completely rely on a property management company, there are three resources that might help to determine the rental vacancy rate in any locality.
Local landlords or property managers
You can approach other landlords and property managers in the area. Ask them about their vacancy rate, what they’re seeing right now, and how it was in the past. You might be able to get some specific data about immediate neighborhoods this way.
Real estate agents
Instead of a property management company, consider approaching a local real estate company to find out all the details about the vacancy rate in a certain area. Some of these agents may even have access to a comparative market analysis regarding local rental property and rental vacancy statistics. This analysis will show how long similar properties to yours have stayed vacant.
The other important information points you need to focus on are:
- How long the properties around you were vacant before their current tenants came into the picture
- What the original list prices were versus the actual renting prices after bargaining or negotiations
High vacancy rates aren’t good news for any landlord or real estate investor. When you have a high rental vacancy rate on several units, or even one, it’s time to take some serious action. If the vacancy rate is high on one unit, but low on another, you may have to take steps for retaining your current tenants, as well as attracting new ones.
Remember, a happy tenant is the key to getting a low rental vacancy rate on any property. Whether this means updating the units, giving them more appliances, reducing the rent, or any other benefit, you have to do what it takes.
Of course, you may want to conduct a pro-and-con analysis first to determine if the rental income will be worth it. Start providing incentives for people to come and stay at your rental property today; a quality tenant is bound to know the difference very soon!
About the author:
Justin Becker is a property owner in the state of Michigan and has a passion for managing communities. He owns apartment complexes and mobile home communities, and has been writing his own blogs for his properties for several years