Vacancy rate

What it means

Vacancy rate is the proportion of a property's potential rent that is lost because the unit is empty.

It can be measured two ways, and they answer different questions:

Physical vacancy — days empty divided by days in the period. A unit empty 24 days in a year has a physical vacancy rate of 24 ÷ 365 = 6.6%.

Economic vacancy — rent lost divided by gross scheduled rent, counting everything that stopped the full rent arriving: empty days, concessions, uncollected arrears and below-market rent. See economic vacancy. This is always the higher figure, and it is the more honest one.

The distinction matters because a fully occupied property can have significant economic vacancy — a tenant three months behind is occupying the unit and paying nothing, which shows as 0% physical vacancy and a large economic one.

For underwriting, most investors apply a normal rate rather than an actual one. A single-family rental in a stable market is usually modelled at 5% to 8%; small multifamily somewhat higher. Using a normal figure rather than last year's actual is what stops a good year being projected forever.

Why it matters

Vacancy is the largest controllable cost in a single-unit rental, and it is almost entirely a function of turnover.

The arithmetic is stark. On the canonical unit at $2,400 a month — $80.00 a day — a 24-day gap between tenancies costs $1,920 of rent. Add the turn cost of about $1,880 in repaint, cleaning, carpet and rekey, and one tenant leaving costs about $3,800: roughly 13% of a year's $28,800 rent.

That figure is what makes retention the highest-return activity available to a small landlord. A lease renewal at $120 more a month gains $1,440 over a year. Losing the tenant to get it costs $3,800. The comparison is not close, and it explains why aggressive rent increases on good tenants usually destroy value.

Vacancy also feeds directly into valuation. It reduces effective gross income, which reduces net operating income, which at a 6.62% cap rate reduces value by about 15 times the annual amount. The $1,900 of normalised vacancy on this property is roughly $28,700 of capital value.

Effect of one turnover	Amount
Gross scheduled rent	28,800.00
24 days vacant at 80.00	(1,920.00)
Effective gross income	26,880.00
Turnover work	(1,880.00)
Physical vacancy rate	6.6%

How it works in practice

Vacancy is managed at the point a tenancy ends, not at the point it is empty.

1. Know the end date early. A lease expiring in 90 days is a decision to make now. Ask about renewal 90 days out, and treat silence at 45 days as a re-letting decision.

2. Market before the unit is empty. The single biggest lever. A unit advertised three weeks before possession ends, with viewings arranged under proper right of entry notice, can be let for the day after the turn completes. A unit advertised the day the keys come back starts its vacancy from zero.

3. Compress the turn. Book the trades before the tenant leaves, based on the move-out inspection scheduled in advance. Most 24-day vacancies are about 5 days of work and 19 days of waiting for someone to be booked.

4. Price to let, not to win. A unit priced $100 above market rent that sits an extra three weeks has lost $1,680 to gain $1,200 over a year — and it will still probably let at market. Vacancy costs more than the increment almost every time.

5. Track both measures. Physical vacancy tells you about your turnover process. Economic vacancy tells you about pricing, concessions and collections. A property with 2% physical and 11% economic vacancy has a rent-collection problem, not a letting problem.

6. Reserve for it. On this property, 6.6% of $28,800 is about $1,900 a year, or $158 a month. Setting that aside monthly turns a turnover from an event into a budgeted cost.

Common mistakes

• Using last year's actual as the forecast. A year with no turnover is not a normal year.
• Measuring only physical vacancy. It hides arrears, concessions and below-market rent entirely.
• Starting to advertise after the tenant leaves. The most expensive habit on this list.
• Holding out for an over-market rent. Vacancy usually costs more than the difference.
• Sequential turnover work. Booking trades one at a time after inspection adds days that nobody is paying for.
• Ignoring seasonality. A tenancy ending in December in a cold market will take longer to fill; a short renewal to move the expiry to spring can be worth more than the rent it costs.
• Excluding vacancy from a cap-rate calculation. It overstates NOI and therefore value.

How BareBones PM helps

Vacancy is a calendar problem first and an accounting problem second, and both need the same data.

BareBones PM stores lease term dates as structured fields, so tenancies approaching expiry are visible in advance — which is the only point at which vacancy is actually preventable.

Because the ledger records charges and payments by period, the gap between scheduled rent and collected rent is derivable rather than estimated: physical vacancy from the dates the unit was unlet, economic vacancy from what was actually received against what was due.

Turnover spending posts against the property, so the cost of a turn — work plus lost rent — is a figure you can look up next time you are weighing a rent increase against the risk of losing a tenant.

For how collections and shortfalls are tracked, see The rent ledger.