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All forms of investing come with some degree of risk—that’s the nature of spending money to make money. If this comes as a surprise, consider it a key lesson in investment. Real estate, particularly rental investing, is no exception.
One of the most challenging and costly risks for buy-and-hold investors is rental vacancies. Vacancies are those dreaded periods when your property sits empty without a resident to pay down your mortgage, taxes, and insurance. While vacancies are a natural part of rental investing when vacancies become frequent or prolonged—especially across an entire portfolio—they can severely impact your profitability.
The good news? There are ways to manage and mitigate vacancies. In this article, we’ll discuss vacancy rates including their definition, how they can result in lost income, and how you can calculate your vacancy and occupancy rates to understand your cash flow. Let’s get started!
What Is Vacancy Rate?
A vacancy occurs when your rental property is unoccupied and generating no rental income. Vacancies are inevitable in the rental business, yet many investors and landlords underestimate their vacancy rate.
Your vacancy rate is expressed as a percentage and measures the proportion of time a property is unoccupied compared to the total time it could have been rented, typically over one year.
Several factors can lead to vacancies, including:
Tenant transitions: When one resident moves out, and another moves in
Major repairs or renovations: Making the property temporarily uninhabitable
Difficult-to-rent properties: Due to location or market conditions
Overpriced rents: Setting rental rates higher than the market will bear
How Do Vacancies Impact Your Bottom Line?
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Vacancies cost money, plain and simple. When your property is vacant, you’re still responsible for paying the mortgage, insurance, taxes, and utilities—expenses that would typically be covered by rental income.
While occasional vacancies are part of the rental business, frequent or prolonged vacancies can significantly erode your profitability, especially across multiple properties.
Low Vacancy Rate: Indicates high demand for your property and is often a sign of good location or condition
High Vacancy Rate: Suggests issues such as an undesirable location, outdated property, or uncompetitive pricing
What Do Vacancies Cost You?
Let’s break down the potential costs of a vacancy for a property with an estimated monthly rent of $1,500 and a $1,250 PITI (Principal, Interest, Taxes, and Insurance) mortgage:
15 days vacant: $750 (lost rent) + $625 (mortgage) + $100 (utilities) = $1,475
30 days vacant: $1,500 (lost rent) + $1,250 (mortgage) + $125 (utilities) = $2,875
45 days vacant: $2,250 (lost rent) + $1,875 (mortgage) + $150 (utilities) = $4,275
60 days vacant: $3,000 (lost rent) + $2,500 (mortgage) + $200 (utilities) = $5,700
Now consider the alternative of adjusting your rental price to fill your property more quickly and minimize or eliminate a period of vacancy. By reducing the monthly rental rate by $50, you decrease your income by $600 per year but even with only a 15-day vacancy, you are already saving $875 of potential expenses.
How to Calculate Vacancy Rate
Vacancy rates are essential metrics for rental investors. Alongside other formulas like portfolio vacancy rate and occupancy rate, these calculations help you assess and optimize your rental business. Let’s take a look at each formula and an example to illustrate it’s usage:
Vacancy Rate Formula
To calculate the vacancy rate for a single property, use the following formula:
Vacancy Rate = Number of Days Vacant / Total Days in Period
For example, if your rental property is vacant for 30 days out of one year (365 days), the formula would work as follows:
30 days vacant / 365 days in one year = 0.082 or 8.2% vacancy rate
Portfolio Vacancy Rate Formula
To calculate the vacancy rate across multiple properties, or a portfolio, the following formula applies:
Portfolio Vacancy Rate = Total Days Vacant / (Total Days in Period x Number of Rentals)
For example, if you have five properties that are vacant for a cumulative total of 90 days in one year (365 days), the formula would work as follows:
90 days vacancy across all properties / (5 rentals x 365 days in one year) = 0.049 or 4.9% portfolio vacancy rate
Occupancy Rate Formula
The occupancy rate formula is the opposite - or inverse - of the vacancy rate. When properly calculated, adding the vacancy rate to the occupancy rate will equal 100%. The occupancy rate is as follows:
For a Single Rental Property
Occupancy Rate = Number of Days Occupied / Total Days in Period
For an investor with one property that is occupied for 320 days per year, the occupancy rate is calculated as such:
320 days occupied / 365 days in one year = 0.877 or 87.7% occupancy rate
For a Portfolio of Properties
Occupancy Rate = Number of Days Occupied (Total Rentable Days - Total Days Vacant) / (Total Days in Period x Number of Rentals)
For an investor with a portfolio of five properties, each of which is occupied for 320 days per year, the occupancy rate is calculated as such:
1,600 days occupied across all rentals (1,825 total rentable days - 225 days vacant across all rentals) / 1,825 days in one year for five properties (365 x 5) = 0.877 or 87.7% portfolio occupancy rate
Manage Vacancy Rates with Evernest
Vacancies may be inevitable, but you can minimize their impact by calculating and understanding your vacancy rate. Use our free Cash Flow Calculator to:
Input expected monthly rent, average time to rent, and renewal rates
Discover potential earnings and expenses
Adjust for variables to see how they affect your vacancy costs and income
Final Thoughts: Understand and Manage Your Vacancy Rate
Understanding and managing your vacancy rate is essential for maintaining a healthy and profitable rental property. While vacancies are unavoidable at times, they don’t have to derail your financial goals. By calculating your vacancy rate, analyzing its underlying causes, and taking proactive steps to minimize it, you can reduce financial losses and optimize your cash flow.
With the right knowledge and approach, you can turn vacancies into opportunities to refine your rental strategy and improve your property’s appeal. If you’re ready to get a team of professionals on your side, consider Evernest. Our wealth of experience and industry expertise allows us to help landlords maximize their rental income and optimize their portfolios.
