Putting up a rental of any sort is a potentially profitable endeavor that nonetheless runs some risks. If you don’t have enough tenants, you won’t be generating as much income. That’s why it’s important to keep track of your property’s vacancy rates.
Using this information for your operations helps you increase your efficiency and get a good idea about your potential flow of income for the upcoming year. With a general idea of how much you’ll profit, you also get a sense of how much cash you can set aside for renovations, maintenance, and expendable funds. At Zumbly, we use a process of home scoring to rate the potential of residential properties. With our expertise in real estate calculation and analysis, here’s our guide to calculating vacancy rate.
What is the vacancy rate?
In the real estate world, the term vacancy rate refers to the number of units in a rental property that are vacant at any given time. The vacancy rate gives the property manager a realistic understanding of how the property is doing compared to competing properties in the same geographic vicinity. Since the numbers don’t lie, this helps property managers who own multiple properties create campaigns for their poorest performing ones. This helps property managers with only a couple properties rethink their marketing and design strategies.
Sometimes vacancy rates have nothing to do with the property itself, but high vacancy rates may indicate an issue with the economy. A vacancy rate of lower than 4% is positive, while anything above 7% is negative. Low vacancy rates signify that people want to live in that area, and they are satisfied with the rents or services provided by the property. The vacancy rate is calculated by taking three types of units into account:
- Vacant units that are ready to be rented
- Units that have just become vacant
- Units under repair
Why does the vacancy rate matter?
The vacancy rate has a direct bearing on the stream of income flowing into the property manager or investor’s pockets. If a property has a high vacancy rate, it means the investor is not generating revenue from all of the units in their building. This can result in financial losses because regardless of the high vacancy rate, the property manager still has expenses associated with the building. After all, a high vacancy rate is directly responsible for negative cash flow.
The vacancy rate affects the capitalization rate of the property. The cap rate, as it’s commonly referred to, is the real return on investment that the investor is getting from the property based on the expected income. Areas with low vacancy rates offer higher cap rates to property managers. A reasonable cap rate in real estate is between four and ten percent or higher than that.
The occupancy rate is the number of occupied units in a multi-family or rental property compared to the total available units. Since this is the opposite of the vacancy rate, then that means a property with high occupancy rates is doing quite well.
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Identify the total number of units in the rental property. This number encompasses the number available units, those under repair, and those already occupied.
Multiply the number of vacant units in the property by 100 and divide the subsequent result by the total number of units in the building.
If the rental property has 200 units in total and out of this number, 80 units are vacant; the property manager needs to multiply the 80 units by 100 and then divide the result by the total number of units, which is 200.
80 x 100 = 8000
8000/200 = 40%, so the vacancy rate for this particular rental is 40%.
Formula for vacancy rate:
(Vacant units x 100) / Total units = % vacant
Average vacancy rates
Average rates for short term rentals
Short term rentals tend to have slightly higher vacancy rates because people stay in them for a shorter period of time. Short term rentals can range from home share options like Airbnb to hotels and motels. These facilities tend to have an average vacancy rate above 25 percent, depending on the season. Since the cost of rent per day tends to be slightly higher for short-term rentals and most short-term rental property managers are using a passive income strategy, a slightly higher vacancy rate is nothing to be concerned about.
An increase in vacancy rates for short term rentals can occur when an area has a newly released long-term rental, which attracts a segment of your short-term customer base that might be looking for a permanent place to stay.
Average rates for single-family properties
The vacancy rates for single-family properties are low, with an average of 5%. This is because most people in that bracket are living in their own homes. They are also looking to start a family and need something stable. They have built their lives around the convenience of where they are living, and they can enjoy a particular lifestyle because of it.
Average rates for multifamily properties
The vacancy rates for multifamily properties are also low because they also need stability and are typically saving for their own single family property. They probably have kids in schools nearby and jobs that are close to their home. Also, these types of units appeal to people who prefer to have close neighbors and prefer to live in the center or near the city.
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What factors affect vacancy rates?
When it comes to vacancy rates, they vary from one place to another and are determined by factors like location, crime, schools, and other social and physical amenities.
The more remote the area is, the higher the vacancy rates for rental properties. After all, renters are looking for convenience and proximity to amenities to determine where they want to live.
An area with a high crime rate is not attractive to people looking to rent. It affects their quality of life since they and their loved ones can’t be safe even within their homes.
Low income affects people’s ability to rent spaces, and so they are either forced to move out or landlords have to kick them out because of lack of payment. It is challenging to sustain low vacancy rates, especially in low-income neighborhoods.
Poor infrastructure and lack of amenities
If there is inadequate infrastructure, like utilities, schools, or hospitals, then renters are not attracted to the area. It would not be able to meet their needs in case they fall ill or need to take their kids to school.
If the rental building is situated in a very competitive market and offers amenities that renters can’t afford to have in their building, then that can lower the vacancy rate. Renters are attracted to buildings with amenities like pools, daycare facilities, and some aspects of technology in terms of safety and utility.
Are you an investor? Find a well-located home for short-term rentals at Zumbly.
How to decrease vacancy rate
If the reason for high vacancy rates lies within the management of the building, then there are ways to reduce the rates.
Here are a couple of ways to do so:
- Offer competitive rents in the same price bracket as competitors
- Maintain the property by having repairs made in a timely fashion and keeping the premises clean
- Maintain the exterior of the building
- Provide basic amenities and advance ones to level up to the competition
- Provide tenants with at least one paid utility like heat or water
- Build rapport with the tenants by being approachable and available
Instead of looking at high vacancy rates as an end to a real estate investment, it should be an opportunity to improve services and relations with tenants in the future. With this positive change in mindset, it can help any investor or property manager to flourish in the real estate industry. But it all starts with the right properties. Get started with Zumbly for home scores and rental calculators to match you with the perfect short or long-term properties for you.
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