All forms of investing come with some degree of risk. That’s the nature of spending money to make money.
If you haven’t realized that by now, well, now you know. This is true for real estate — particularly rental investing. One of the riskiest and most painful factors that buy-and-hold investors experience is rental vacancies.
Vacancy is that dreadful span of time when your property is sitting empty, with no tenant paying down your mortgage, taxes, and insurance. If you read one of our recent articles on the tenant lifecycle, you know this is par for the course.
However, what isn’t par for the course is having the frequency and length of vacancies go up, particularly across an entire portfolio of rental houses. When this happens, you start losing money. But don’t worry — there are things you can do about it.
This is why we are introducing our new blog series on rental vacancies. In this first article, you’ll learn what vacancy rate is, why it causes you to lose money, and how to calculate it in your rental investing business.
As mentioned above, vacancy is when your property is sitting empty and has no tenant living in the residence. Vacancies are inevitable as a rental investor. However, what a lot of investors and landlords run into trouble with is how much they underestimate their vacancy rate.
Your vacancy rate is represented as a percentage and compares the amount of time a property could be rented to the amount of time a property was actually rented. The vacancy rate is typically gauged spanning a one-year period (Source).
Rental properties can become vacant due to a number of factors, such as:
Before we dive into explaining how you should calculate your vacancy rate, it’s helpful to know what this means for your rental business as a whole. In layman’s terms, how does a vacancy at your rental property lose you money?
When there isn’t a tenant living in your rental and paying monthly rent, you lose money. I alluded to this earlier, but you’re likely still paying the mortgage, insurance, taxes, and any other expenses normally paid by a tenant…all with your own money.
The situations discussed above happen from time to time. That’s how rentals work. But… if this happens too often, for too long, and across several units, you’re quickly going to start losing more money from your monthly rental income.
Each individual property has a vacancy rate that indicates how long that property has sat vacant. A low vacancy rate is a healthy indicator that your property is in demand due to the location or the state of your property. A high vacancy rate typically means the exact opposite — your property is in an undesirable neighborhood or is outdated.
On a $1,500 estimated rental home with a $1,250 per month PITI mortgage, plus utility expenses, a vacancy can cost:
On a $1,500 per month home:
Dropping the price by $100 from the start and “losing” $1,200 – OR – by thinking your home is worth more than the market will bear, losing $2,000, $3,000, $4,000, $5,000, or more?
The choice is yours.
Be aggressive with your pricing decision. It’s much better financially to rent your home within the first few weeks it is on the market making you more money in the long run.
When you price a home right, you get multiple applications from strong potential tenants allowing for the opportunity to accept the best-qualified renter possible. This is a good thing and it allows us to choose the absolute best tenant for your home.
Along with vacancy rate, there are a few other formulas that are beneficial to know as a rental investor.
Here they are:
Here’s the basic formula to calculate vacancy rate:
If an investor has one single-family rental and the property is vacant for 1 month out of the year, the vacancy rate would be:
30 days vacant / 365 days per year = 8.2% vacancy rate
Now let’s calculate the vacancy rate for your entire rental property portfolio. Here is the formula from before, with a small twist:
Let’s say you have five single-family rental properties with the following number of days vacant:
Total days vacant: 90 days vacant
With that in mind, here is how you’d calculate the portfolio vacancy rate based on the numbers above:
90 days vacant / 1,825 days (365 days per year x 5 homes) = 4.9% portfolio vacancy rate
Occupancy rate is the opposite – or the inverse – of vacancy rate. When properly calculated, adding the vacancy rate to the occupancy rate will equal 100% (Source).
Here is the formula for a single rental property:
Here is the formula for multiple rental properties:
320 days occupied / 365 days per year = 88% occupancy rate
1,825 days occupied ((365 days x 5 rentals = 1,825 days) – 90 days vacant) / 1,825 days per year = 95% occupancy rate
Vacancies as a rental property investor are inevitable. This is why learning to properly calculate vacancy rate is so important. From there, you’re able to identify the key factors contributing to your property remaining vacant and work to lower it.
To better calculate vacancy rate in your business or even the next time you buy, you can use our free Cash flow Calculator and easily calculate for yourself:
We hope you enjoyed the first article in our NEW blog series: rental vacancies. In our follow-up, we will lay out 3 ways for you to actively decrease your vacancy rate at your rental property. Stay tuned!
Lucas is a Content Strategist for Evernest. When he isn’t doing research or creating content, you can find Lucas drinking coffee or eating tacos. He is a native of western North Dakota now living in Austin, TX.