If you’re like many new investors or those who want to begin real estate investing, you’ve probably heard the term vacancy rate – but what does it mean, and will it apply to you? This guide explains what vacancy rates are and how they affect your bottom line.
What Does Vacancy Rate Mean in Real Estate Investing?
A vacancy rate is the percentage of all empty units in a rental property. If you have a rental property with four living units and one of them is unoccupied, you have a 25 percent vacancy rate. In a rental property with 100 units where 10 are unoccupied, you have a 10 percent vacancy rate.
Related: The trick to finding good tenants
Why Are Vacancy Rates Important?
Every vacant unit you own is money you’re not earning – but that’s only one reason knowing your vacancy rate is so important. Your vacancy rate is also a measure of how well your building is performing when compared to other, similar buildings in the area. Vacancy rates can also apply to single-family properties in the same area (such as the same subdivision or general neighborhood where you own more than one rental home).
For example, if you have a 10 percent vacancy rate when other property owners have 3 percent vacancy rates, it may be a sign that your property could use some improvements, you need to make your lease terms more attractive, or you should start allowing pets so you can keep up with other property owners and capture your segment of the market.
However, if you have a 10 percent vacancy rate when others have a 25 percent vacancy rate, it’s a sign that you’re doing something better than the other property owners are.
The bottom line is that the lower your vacancy rate, the healthier your building is. A low vacancy rate signifies that people want to live in your area or building; higher rates mean that people don’t want to live there.
Related: Finding a duplex, triplex or fourplex
Tracking Vacancy Rates Over Time
Aside from outside factors, such as changing community amenities, road work, crime rates and other issues, you can keep tabs on several aspects of your business by tracking your vacancy rates over time. One of the most important ways to use your long-term vacancy rate measurements is to determine whether your property is competitive with other properties in the area, including whether the price is right, the amenities you offer are on par with others, and how well your advertising efforts are paying off.
Your vacancy rates in a certain area can even help guide you when you’re deciding whether to invest in another, similar property in the same area.
Finally, vacancy rates can help you when you want to sell your multi-unit property. You can show prospective buyers that you have no vacancies, and share the vacancy rates of your nearby properties, as well.
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