The Ultimate Guide to Vacancy on Rental Properties

If you're looking to learn more about vacancy on rental properties, then check out our Ultimate Guide to Vacancy on Rental Properties.

Vacancy is the money lost from Gross Potential Income due to the property being unoccupied or in non-payment from the current tenants.

It is important to estimate vacancy when analyzing deals you're considering buying. It is one of the primary inputs on The World's Greatest Real Estate Deal Analysis Spreadsheets™ for you to enter when you start your deal analysis. You can download the spreadsheet for free.

The World's Greatest Real Estate Deal Analysis Spreadsheet™
The World's Greatest Real Estate Deal Analysis Spreadsheet™

Vacancy is a combination of skill of management and price you're charging for the property compared to Fair Market Rent.

If you start advertising your property for rent AFTER the current tenant moves out, you'll have a higher vacancy.

However, if you start advertising your property for rent 60-90 days prior to the current lease-expiration, you'll find that your vacancy is considerably lower and the quality of your tenant considerably higher.

The higher quality tenant is typically due to finding tenants that are planners and not waiting until the last minute to find a property they can occupy immediately. By having a property where the new tenant needs to wait until the current tenant vacates the property, you find a new tenant that is a planner and is not desperately in need of immediate housing.

There is typically a balance between trying to get maximize rent on the property and minimizing vacancy. Sure, you may be able to hold out and get top dollar for rent, but it may take you a month or more of vacancy to do so. We recommend you start 60-90 days prior to the property being vacant and start your rent high. Then, based on call volume on your advertisements, drop rent as you get closer to the property being vacant. This should help you achieve an optimal balance of high rent and low/no vacancy.

A well-skilled landlord starting 60-90 days in advance of lease expiration should have a vacancy in the 3-5% range.

Minimize Vacancy to Improve Cash Flow on Rental Properties

While the following video is not exclusively about minimizing vacancy, it does discuss ideas on how to overall improve cash flow.

Calculating Gross Operating Income

Knowing your vacancy on a rental property is critical to calculate Gross Operating Income.

Annual Gross Operating Income

Annual Gross Potential Income $27,720
- Annual Vacancy Dollar - $832
Annual Gross Operating Income = $26,888

Gross Operating Income unlike Gross Potential Income does take into account the impact of vacancy on the property.

For Typical 25% Down Payment Gainesville, Florida Rental Property, we're estimating that the property is vacant 3% of the time. That means that we're not seeing $831.60 of the $27,720 that we thought we might get from the property.

Annual Gross Operating Income

Annual Gross Potential Income $27,720
- Annual Vacancy Dollar - $832
Annual Gross Operating Income = $26,888

And, you'll need the Gross Operating Income to calculate Cash on Cash Return on Investment, Cap Rate and more.

Primary Input

Vacancy Primary is considered a primary input in the Hierarchy of Real Estate Metrics.

It is used to directly calculate Gross Operating Income Secondary.

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