The Vacancy Rate refers to the percentage of unoccupied units relative to the total number of rental units available at a property over a specified period.
An unoccupied unit does not generate any rental income for the property owner, so the vacancy rate is closely tracked among participants in the real estate market.
The vacancy rate measures the proportion of rental units that are unoccupied at a particular time and quantifies the dollar amount of rental income lost from unoccupied units throughout a certain time frame.
The rate of vacancy is a key driver of revenue in the following industries:
Because vacancy is directly tied to rental revenue, the metric can be used to assess historical performance and market behavior (i.e. seasonality, cyclicality), as well as forecast future demand.
Backward-looking historical data collected by a property manager or real estate investor can help determine pricing and marketing strategies going forward.
The formula for calculating the vacancy rate on a rental property is as follows.
For example, if a single-family rental available for 365 days in a year was vacant for two months out of the twelve-month period, the rate of vacancy is 16.4% (60 Days ÷ 365 Days).
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The vacancy rate is the inverse of the occupancy rate, so the formulas for calculating the occupancy rate on a particular date and annual basis are as follows.
Moreover, the formula below is an alternative method to calculate the vacancy rate using the occupancy rate.
To optimize operating efficiency and maximize rental income, properties should attempt to reduce their rate of vacancy over time, all else being equal.
While a higher occupancy rate is perceived as a positive sign if the underlying driver is related to increased demand from consumers, which allows the property owner to raise prices and become more profitable.
If the occupancy rate is increased by undercutting competitors' prices, the effect on revenue and profits could actually be negative.
For property owners with a diverse portfolio of rental properties, vacancy is an important consideration when comparing performance between properties.
Understanding if the demand among renters is rising around a certain location can enable the property owner to set prices appropriately to pocket more profits and capitalize on these trends.
In contrast, becoming aware that renters are shifting away from an area is typically a red flag, which can lead to convincing an owner to sell the property before it loses more value.
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Suppose an Airbnb host is trying to calculate the vacancy rate of their rental property.
In 2021, the rental property was listed as available for rent each day of the entire year.
Of the 365 days the property was available, the number of days the room was occupied was 200 days.
Given those two assumptions, we can calculate the number of days that the room was unoccupied as 165 days.
By dividing the number of vacant days by the number of days available for rent, we arrive at 45.2%.
From there, we can also back-solve the occupancy rate as 54.8% by subtracting the vacancy rate from one.
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