What Are Rental Vacancy Rates and How Do You Calculate Them?
If you plan on purchasing vacant properties to flip homes, you’ll have to calculate your rental vacancy rates. Learn more about this fee here.
Are you looking into purchase vacant rental properties in specific market areas? Are you a house flipper who is looking for more information for rental vacancy rates? Did you know that in Q1 of 2021, the rental vacancy rate for the United States of America was 6.8%?
That means that across the United States, there was an average of 93.2% occupancy rate? This is excellent news for house flippers and property investors.
If you are looking for more information on rental vacancy rates, continue reading below. We will cover the different rates you need to be aware of before you purchase a property and who you can contact to help with buying your properties.
What Are Rental Vacancy Rates?
Rental vacancy rates are usually expressed as a percentage that compares the number of days tenants can rent a property (typically 365 days a year) to the number of days the tenants occupied the property.
There are several reasons why your property can be vacant. The unit turn time can create vacancy between the time your current tenant moves out, and your new tenant moves in.
Other vacant property reasons:
- Major repairs or updates
- The rental property is in an undesirable area
- Rental rates are above the average market price
If your rental rates are too high for the property’s area, you will most likely have a more challenging time finding someone to rent a unit. It also may seem ideal to pick a rental property that is in a cheaper neighborhood but may not be a great idea if you don’t already have potential clients.
Vacancy Rate vs. Occupancy Rate
As mentioned earlier, the physical vacancy rate is the percentage of all available rental units in a property that are unoccupied at a specific time. Occupancy rates are different than rental vacancy rates. Occupancy rates are the percentage of units in a rental property that is currently occupied.
Vacancy Rate Formula
The formula to calculate rental vacancy rates is the number of vacant days divided by the number of rentable days. For example, if you have one single-family rental property and your property is vacant for two weeks out of the year, your rental vacancy rate would be about 3.8%.
A property with a lower economic vacancy rate means that the property has solid rental sales. A higher rental vacancy rate usually indicates that the property is underperforming.
Calculating Portfolio Vacancy Rates
Property investors who have a portfolio of rental properties can still utilize the basic vacancy rate formula; they just need to add an additional step. If you are an investor with five single-family rental homes, you will want first to figure out each home’s number of vacant days.
Example of the five property’s vacancies:
- Property #1: 3 days vacant
- Property #2: 40 days vacant
- Property #3: 4 days vacant
- Property #4: 0 days vacant
- Property #5: 9 days vacant
For the example above, this investor would have a total of 56 vacant days. The vacancy rate formula is the number of vacant days divided by the number of days per unit per year. In this example, the formula would look like 56 vacant days / 1,825 days (365 days per year x 5 single-family rental homes) = 3%.
Calculating Occupancy Rate
As mentioned earlier, occupancy is the inverse of the vacancy rate. If you calculate the occupancy correctly, you should get 100% after adding the vacancy rate to the occupancy rate. We will use the portfolio example for this scenario. You first will need to figure out how many days out of the year the properties were vacant.
In the portfolio example, the investor had five properties, which would equate to 1,825 possible rental days because, in this scenario, we are talking about more than one investment property. If you were trying to calculate for one property, you would use 365 as your base for the possible renting days.
The investor had 56 days of vacancy across all of their properties, so subtracting that number from the total number of probable occupancy days. The equation for this scenario will look like 1,769 days occupied (365 days x 5 rental homes = 1825 days) – (56 vacant days) / 1,825 days per year.
The occupancy percentage for this investor’s portfolio is 97%. When you add that 97% occupancy rate to your 3% vacancy rate, you get 100%.
Market Vacancy Rate
Investors and house flippers utilize three primary sources to find market vacancy rates: the U.S. census bureau, property managers, and real estate agents. These main sources are essential to review before you consider purchasing a property because they will let you know if the area is desirable or not.
U.S. Census Bureau
Every year, the U.S. Census Bureau puts out a report of the quarterly vacancy and homeownership rates. These rates are filtered by state and the Metropolitan Statistical Area (MSA).
Property managers are your best resource when trying to figure out the market value rate. They are more knowledgeable than the Census Bureau and real estate agents.
Highly regarded property managers can give you the specifics on vacancy rates down to a street level, building, or a neighborhood if you need them. Property managers focus mainly on managing and leasing single-family properties.
Real Estate Agents
Real estate agents are also excellent resources to use when trying to figure out the market vacancy rate. Real estate agents who are local to the market can generate a list of active rentals, the days they have been sitting on the market, and the ratio between the actual rent and asking rate in the area.
Why Do Vacancy Rates Vary?
Vacancy rates are vital to look into to see the strength of certain rental market areas. These rates are highly influenced by supply and demand. If you notice a rental market with a high vacancy rate, there could be some concerns there.
This may mean that there is the need to upgrade or repair the units, or there may be an oversupply of units. This can be a considerable risk investment if these houses are harder to rent.
Factors of varying market vacancy rates:
- Zoning regulations
- Job growth
- Job loss due to closures
- Business expansions
If the market area has attractable interest rates for housing, more people may be inclined to purchase a home instead of renting. On the flip side, the interest rates may increase, making it harder to buy a home, forcing individuals to rent. These factors vary from market to market, so make sure to do your research before investing in a property.
Keeping Vacancy Rates Low
If your property is in an area with a high vacancy rate, your property will have a lower market value. The goal is to find an area with a lower vacancy rate, maximizing your market value. In addition to finding an area where the market is good, you will want to strategize ways to keep that vacancy low.
Ways to keep your vacancy rates low:
- Market your units across multiple offline and online resources
- Maximize your curb appeal
- Screen your tenants to reduce your turnover rates
- Prepare for updates and repairs for units that have tenants leaving
Maximizing the curb appeal of your properties is very important. Just like when you have a first impression when you first meet someone, your possible tenants have that same experience with your property.
Keep the landscaping neat and make sure the property is always clean. Another tip to keep your vacancy rates is to proactive reach out to your current tenants.
If you notice one of your tenants is getting close to the end of their lease, reach out to them for renewal. Offering them an incentive for signing another lease is a great way to keep your properties occupied.
Managing Your Properties More Effectively
Knowing the local vacancy of your market area is critical in managing your properties effectively. Predicting your market shifts is an excellent way to manage your properties better. It could be an early property value indicator if you notice an increasing vacancy rate in your market area or a nearby market.
Sometimes these shifts are temporary due to a disruption in the economy. For example, maybe a significant employer closed down or moved locations, causing people to move out of the area. Of course, you can only do so much preparation on your end, but it is essential to keep up with any changes in the market so you can make the proper adjustments.
Rental Property Funding
As you now know, knowing the rental vacancy rates of properties in specific markets is crucial to know before you even consider purchasing the property. Vacancy rates have a direct effect on how much income your rental property will generate. If you are ready to start the process of funding your rental property, contact us now. Orchard funding has a plethora of vital resources for you to look into, and we offer competitive rates for the loans you need.