Vacancy Rate

· 2 min read
Vacancy rate tells you what percentage of a rental property’s available units are sitting empty — and it’s one of the fastest ways to gut-check…

Vacancy rate tells you what percentage of a rental property’s available units are sitting empty — and it’s one of the fastest ways to gut-check whether an investment will actually make money.

The math is straightforward. Divide the number of vacant units by the total number of units, then multiply by 100. A 10-unit building with one empty apartment has a 10% vacancy rate. Simple enough, but the implications for your bank account are huge.

How Vacancy Eats Your Profits

Let’s say you own a fourplex collecting $1,200/unit per month — $57,600/year at full occupancy. Your operating expenses and mortgage eat $48,000/year. That leaves $9,600 in annual cash flow, or $800/month.

Now one unit sits vacant for two months. That’s $2,400 in lost rent — 25% of your annual profit, gone. Add the $500 turnover cost for cleaning and minor repairs, and a single vacancy event just wiped out three months of cash flow.

Market Vacancy vs. Property Vacancy

Market vacancy rate is the big-picture number for an entire city or neighborhood. The national average hovers around 6-7% for residential rentals. But your specific property’s vacancy rate might be 0% or 20% — and that’s what actually matters to your bottom line.

Check local market vacancy rates before buying. A market running at 3-4% vacancy means tenants are competing for units and you can be selective. A market at 12%+ vacancy means you’ll be competing for tenants, which usually means lower rents and more concessions.

What Causes High Vacancy

Overpriced rent is the most common culprit. Landlords get anchored to what they think a unit should rent for instead of what the market actually supports. A unit priced $100/month over market that sits vacant for six weeks costs more than just dropping the rent from day one.

Poor property condition, bad locations, and slow turnover processes also drive vacancy. If it takes you three weeks to repaint and list a unit after a tenant moves out, that’s three weeks of $0 income. Professional managers typically turn a unit in 5-7 days.

How Investors Budget for Vacancy

Smart investors never assume 100% occupancy. Most budget 5-8% vacancy for well-located properties in strong markets, and 8-12% for riskier areas or older buildings. When you’re running numbers on a potential purchase, always subtract a vacancy allowance from gross rents before calculating cash flow.

On a $2,000/month rental, an 8% vacancy reserve means setting aside $160/month — or about $1,920/year. That’s money that stays in a separate account to cover the months when the unit earns nothing.

Factor vacancy into your purchase analysis with our mortgage calculator, and read the full buying guide before committing to an investment property. More terms available in the glossary.