What is an ideal vacancy rate??

Investor · Indianapolis, IN · Member since 2015 · 394 posts · 116 votes

Wanted to see what everyone thought about this. What is a healthy and ideal vacancy rate? There's a fine line between too low and uncomfortably high; if it's too low, you're more than likely leasing for under-market amounts, and if it's too high, you might be too overpriced. I've heard a high single digit vacancy rate is right on the money. Thoughts?

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Kevin Harrison

Investor · Woodbridge, VA · Member since 2015 · 476 posts · 197 votes

10y

Most people budget for 1 month of vacancy or 8%. This really depends on your market though. Places like San Francisco and NYC usually have almost no vacancy if it is a good unit because there is a shortage of stock there while places like the mid-west can run 5-12%. My unit in Ga is at the very top of the SFR market price but I have almost no vacancy (2% for fixing things during turnover) but I also keep the place immaculate as far a rental goes, that's way lower than the average for the area but it doesn't mean that im underpriced.

I think most people would tell you that as long as you're happy with your returns 0% vacancy is the best number and personally I think anything over 10% means you need to re-evaluate that asset baring special circumstances.

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Kevin Harrison
Investor · Woodbridge, VA · Member since 2015 · 476 posts · 197 votes
10y
Most people budget for 1 month of vacancy or 8%. This really depends on your market though. Places like San Francisco and NYC usually have almost no vacancy if it is a good unit because there is a shortage of stock there while places like the mid-west can run 5-12%. My unit in Ga is at the very top of the SFR market price but I have almost no vacancy (2% for fixing things during turnover) but I also keep the place immaculate as far a rental goes, that's way lower than the average for the area but it doesn't mean that im underpriced.
I think most people would tell you that as long as you're happy with your returns 0% vacancy is the best number and personally I think anything over 10% means you need to re-evaluate that asset baring special circumstances.
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Vincent Crane
Realtor · Atlanta, GA · Member since 2015 · 693 posts · 357 votes
10y
8% is normal
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Marcia Maynard
Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
10y
5% for budgeting purposes.... but aim for 0%.... realistically it depends on your market and your product.
Depends whether you have high turnover or not. Our longest tenancy is 26 years and counting, our shortest tenancy was 2 months.
Depends on the condition of the unit upon vacancy and how fast your turnover team works. This also applies to buying a fixer, its condition and how fast your rehab team works. It all impacts holding costs. The goal is to reduce the time frame as much as possible so the asset will generate income.
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Justin R.
Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes
10y
Alain Perez-Majul The "high single digit" you referenced applies to large residential projects. If you've got a sales staff and marketing in place, you always want something to sell the person who calls or walks in the door. For smaller landlords (most of us) it's much less of a science and more art to set perfect rent rates. We just don't have the data to get it perfect. Given the cost of turnover in this case, it's often better to solve for total vacancy/turnover costs rather than just optimizing rental amounts.
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Alain Perez-Majul
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Investor · Indianapolis, IN · Member since 2015 · 394 posts · 116 votes
10y
Awesome. Thanks for the feedback and insight, everyone! Much appreciated :)
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Marcus Johnson
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
10y
IMO, none. Your goal isn't to lose money each month due to vacancies. I believe that a quality apartment in a good location at the right rent will never go not rented.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
10y
What's ideal? 0% is ideal. What's normal? Depends on a lot of factors - what demographic you are catering to, the local real estate market, the local economy, the pricing of your individual unit, the neighborhood, etc.
In my opinion, there's no such thing as "too low" in vacancy rates for your portfolio. Using your proposed rationale that "too low" means you are renting too cheap, let's look at numbers. Let's say you rent your apartments for $1000, and the market rate is $1200 (so you are 20% below market, a pretty drastic figure). Because of this you have essentially no vacancies, while "the market" has vacancy rates of 8% (one month average).
12 months x 1000 = $12,000
12 months x 1200 x .92 = 13,248 ($1,248 difference)
So in this situation, you could gain an additional thousand bucks by raising your rents to market level. On the other hand, having somewhat below market rates means you have the pick of the litter when it comes to tenants, because everyone wants to save money. In this example, you are so far below market you could probably come up $50-75 per month, maintain the essentially 0% vacancy, and still have pick of the litter:
12 months x 1050 = $12, 600 ($648 difference)
You always have to consider these things in the context of your particular situation. If there is no avoiding an 8-10% vacancy rate almost regardless of your rents, because of other factors - poor neighborhood, unstable economy, etc - then you would probably be wise to just price right at market or maybe even a hair above and accept the vacancies. If you live in a seller's market, you can probably have a much better landlording experience going a route like I posted above than the guy who just has to have that extra $600 annually.
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Gino BarbaroPro Member
Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
10y
@Alain Perez-Majul
Hi Alain
If you are getting ready to sell, try to get the max amount in rent per unit. The banks and investors always factor around 5 % for vacancy, so even if you are 100% occupied you will still be viewed as having spme vacancy
I think 5% is a reasonable figure for a healthy market. If you are running at 100% occupied it may be time to raise rents
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Alain Perez-Majul
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Investor · Indianapolis, IN · Member since 2015 · 394 posts · 116 votes
10y
Again, really appreciate the feedback! You guys rock- definitely have a better concept of it now a more comprehensive way of looking at it.
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Marcus Johnson
Investor · Saint Paul, MN · Member since 2015 · 663 posts · 512 votes
10y
Here is an example as to why staying at market rent in a good neighborhood. Let's say two different landlords each have an SFH and both units ha e all things equal. Landlord 1 is attempting to rent for $1000 and landlord 2 is renting for $950. 12x$950= $11400 11x$1000=$11000 (1 month vacancy) As you can see if applicants keep going to the more reasonable rent versus the landlord who is trying to get more ROI. Landlord 11actually ends up losing $400 every year.
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Sarnen Steinbarth
Commercial Real Estate Broker · Fort Collins, CO · Member since 2015 · 308 posts · 151 votes
10y
I always prefer slightly lower rents = less occupancy, more applicants, less utilities (during vacancy), etc.
My past company we had less than 5% average portfolio-wide (a few hundred units).
Some of my personally-owned rental units are in a hugely popular market and have been at 0% for 2 years.
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Christopher B.
Investor · Southeast, MI · Member since 2016 · 425 posts · 184 votes
9y
To be clear, are the dollars we put aside for vacancy rate, to cover the missed Rental Income, and costs for turn-over (cleaning, marketing, etc.), in the case of a vacancy?
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Deanna McCormick
Minneapolis, MN · Member since 2013 · 2k+ posts · 1k+ votes
9y
0 Zero is the best.. but honestly if you advertise, and have a call back waiting list, are at market and have a good product it's not that hard to stay at 97%.. which I didn't go under in a 120 unit market rate complex for several years.. I knew what to do and how to do it..
But all depends on how many unit you have and how prepared, equipped to do turn repairs and maintenance painting.. the turn work.. it's easy to rent them out,, but to promise and get them cleaned up for occupancy turn work can be a challenge..
If I lost more than a week personally on any of my own rental properties I would have given myself a talking to.. unless it's a eviction action.. and I haven't had more than a handful in 30 years.. I get in work around leaving tenant if I can and if I have to return and complete after new tenant is in.
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