How to determine vacancy in a market.

Question

I'm having trouble determining vacancy rates when analyzing potential markets. How do I know if I should be saving 5%, 10%, 15% or whatever the number is? How do you go about determining what you should be saving?

Account Closed · Answer

@Elijah Williamson

If your local market takes 2-3 months to find a tenant don’t invest there. That’s horrible numbers.

Beginning, don’t use a number less than 8.5%. That’s 1/12. That at least gives you a month at lease end to find a tenant on a year lease. You’ll end up 1/13 months vacant and under budget if you budget this way.

Elijah Williamson · Answer

But how does one come up with this number? What if you save 5% for vacancy and when there's a turn over you end up waiting 2-3 months before filling that vacancy?

One reason I'm asking this is my local market (which I don't intend to invest in) often takes local landlords 2-3 months to find a new renter and most renters don't seem to stay for more then a year. My neighbor is trying to rent her property out and it's been on the market for around 6 months now. How do I know I'm not walking into the same situation when analyzing a new market?

Roy Cleeves · Answer

Yes - if vacancy is 2 to 3 months then you should use a hard number based upon that instead of a percentage.

Jon Kelly · Answer

@Elijah Williamson experience and speaking with local professionals (agents, investors, property managers).

DO NOT base your estimates on one person’s experience. There’s likely many other factors the one neighbor has a vacancy for 6-months.

When in doubt, lean towards being conservative with your estimates

Kyle Knowles · Answer

@Elijah Williamson Simply consider how long you think will stay in your apartment, say 3 years. Then consider how long it will take you to turnover the unit. Paint, carpet, ceiling tiles etc., and marketing and finding a new tenant, approx 2 months if a rookie. Add how much rent will accumulate during that turnover and add all costs. Then divide by how many months the tenant is staying there.

Example:

3 years for every vacancy

2 months for every turnover

$2500 for contractors and marketing

Rent: $1600/month

$1600 x 2 = $3200

+

Turnover cost $2500

Total Vacancy Cost: $6700

Total Rent during 3 years: $57,600

Vacancy/Rent =  .1163 x 100% = 11.63% Vacancy

Anthony Therrien-Bernard · Answer

You can't predict the future, if you are this tight you are buying the wrong property... You should have a lot more headroom than 5% in any case

Anthony Therrien-Bernard · Answer

Overtime you will be able to have your own numbers, but to start you can probably use something like 5% but the thing is vacancy will depend not only on where you are buying but also what kind of property, what your rent pricing will be (aka if you are under market you might have less vacancy) how heavily you will market the property for re-rental etc. Even with the exact same property in sure we can take 2 landlords on here or 2 property managers and end up with widely different numbers.

The important part is to account for some vacancy, I don't think it really matters to be that precise, if there isn't enough buffer for much higher vacancy it's likely not the right property regardless

Roy Cleeves · Answer

5% is pretty much the standard.