AKA Digest it, count it, reduce it.
In this article:
- the importance of the accurate vacancy rate
- factors affecting vacancy rate
- types of the vacancy rate
- vacancy rates calculation formulas
- recommendations on decreasing vacancy rate
- SWORP TIP!
In this article, we will explain why it is vital to calculate the vacancy rate properly, and what measures you can adopt to keep your vacancy rate as low as possible.
The vacancy rate belongs among the least popular core metrics in property investment. Interestingly, even though most investors know that they cannot expect their rental business to be successful if vacancies are underrated, it is a common mistake property investment greenhorns do - not calculating, but merely estimating it. The truth is that revenue projections of your rental are simply an ivory tower if you count on an inaccurate vacancy rate.
The vacancy rate conveys how much of the rental income you annually lose due to unoccupancy. If you look at the vacancy rate of a certain location and see it is low (we will explain what “low” vacancy rate means later), it indicates that rent demand is high there, and property investors might profit from renting a property there. You can also use the vacancy rates to compare two or more properties in the same area to assess their potential performance.
Note that the rate can vary, because the factors that impact it are not fixed either. A property may have a great (low) vacancy rate at the moment of purchase, however, if you resign on maintenance simply no one knows that your property is available for rentals, the vacancy rate may easily turn to average and even wind up tower high.
Several factors influence the rate:
- Attractive/undesirable location of rental property
Usually, it is difficult to find a tenant willing to rent in a risky, secluded, or nettlesome location. The more difficult, the longer vacancy, therefore the higher the vacancy rate. Thus, evaluate the location thoroughly before you purchase a rental property there.
- Fair/unreasonable asking rent
The period of vacancy may unbearably prolongate if the rent you ask for (in the context of fair market rent) is high. Prospective tenants will prefer lower-rent properties in the neighborhood.
- Long-term or repeated maintenance and repairs
If repairs of units or the whole property take long, the vacancy rate will rise. Thus, schedule the repairs and maintenance tasks for a period when the financial loss hurts less.
We distinguish 3 types of vacancy rates:
- physical vacancy rate
- economic vacancy rate
- market average vacancy rate
The physical vacancy rate displays how long the unit remained vacant a year. The economic vacancy rate shows the total gross potential rent which has been lost for the period the unit was unoccupied. Suppose you compare investment properties in the same area aiming to cherry-pick the one most promising. In that case, you need to know the market vacancy rate as it indicates the property’s performance in the context of the average market vacancy rate for the designated area. The market vacancy rate is a good indicator of whether the property is worth purchasing.
The physical vacancy rate formula is calculated differently for single-unit and multiunit properties. For single-unit properties/apartments, you count the total amount of weeks the unit has been vacant in a year and divide it by the total amount of weeks the unit could have been rented.
Example: A rental apartment has been vacant for 2 months (8 weeks). Divide 8 by 52 weeks (a year has 52 weeks). Multiply 8/52 (2/13) by 100. The result is a vacancy rate percentage of 15,4% rounded.
PHYSICAL VACANCY RATE = VACANCY TIME / POTENTIAL RENT TIME x 100
For multiunit properties, multiply the number of vacant units by 100 and divide that by the total number of units in the property.
Example: A rental property has 20 units and 2 of them are vacant. Multiply 2 by 100, which is 200. Now divide by the total number of units, 20. The result is a vacancy rate of 10%.
PHYSICAL VACANCY RATE = VACANT UNITS x 100 / TOTAL NUMBER OF UNITS
For economic vacancy rate calculation, take the total rent lost during the vacancy period and divide it by the total number of potential rent be collected per year.
Example: You rent an apartment for 18 000 CZK per month. The gross potential rent of this apartment would then be 216 000 CZK. The apartment has been vacant for 27 days out of a 31-day month, which is 87%. Such ratio is, applied to monthly rent, 15 660CZK. Finally, divide 15 660 by 216 000, The economic vacancy rate of this apartment is 7,2% rounded.
ECONOMIC VACANCY RATE = (VACANT DAYS/MONTH x MONTHLY RENT) / POTENTIALLY COLLECTED RENT
A few paragraphs ago, we discussed the factors that affect the vacancy rate. If you strive for as low a vacancy rate as possible, you shall start from there. We also have a few more recommendations from our experience that might be helpful for you.
- Choose a property located in an area with development potential or just a generally popular area
- Charge a fair rent
- Screen the prospective tenants
- Accept tenants for the long term. Switching tenants round the clock is not good for the unit, let alone for you, considering the efforts you have to invest into all the agenda connected to getting yourself a new tenant
- Be sure to have major repairs and maintenance done before your first tenants move in or at least get it done as fast as possible
- Provide amenities your tenants will adore you for
- Always follow the contract
- Consider hiring a property manager. If you are busy and you know that will only have minimal time to deal with property management, it would be very difficult for you to keep the vacancy rate at an acceptable level
- Use SWORP. You will see for yourself what needs to be resolved. Expired contracts, debtors, and vacant units you don’t know of? Not on SWORP’s watch.