Whether you’re considering direct ownership of investment real estate or buying fractional shares in a Delaware Statutory Trust (DST), you need to know the numbers. There is the capitalization rate, or cap rate. Also important are the price-to-rent ratio and cash-on-cash return.
Then there is the vacancy rate of the property you’re examining. The vacancy rate can help you understand the asset’s market strength, and demand for the product you might be thinking about buying. This metric can also be a good indicator of rental income.
Additionally, the vacancy rate of a property can let you know how well a building might be performing, relative to others in the same market or area.
What it Is
Google the term “vacancy rate,” and you’ll find many definitions.
For example, a vacancy rate determines rental income you might receive from occupied units or square footage, or income you could lose when that space or unit isn’t occupied. Another definition involves the time during which a particular investment property sits vacant, or unused. Here’s another explanation: The vacancy rate represents a rental property’s unoccupied space or units during a particular point in time.
Boiling the above down into a simple statement: A vacancy rate describes a rental property’s unoccupied available units or space, relative to the property’s total supply. As such, vacancy rates (and their opposite, occupancy rates), are listed as percentages.
Figuring it Out
When calculating a rental residential property’s vacancy rate, the formula consists of the following:
(Total Number of Vacant Units x 100) ÷ Total Number of Property Units
For example, if you own a 80-unit multifamily property, and 10 of those units are vacant, here’s how that rate might be calculated:
(10 x 100) ÷ 80 = 12.5% vacancy rate
If you’re looking for the vacancy rate of commercial real estate, you’d use square footage as your metrics, and multiply the amount of available/vacant space by 100, then divide it by the total amount of leasable square feet.
As a hypothetical, if you own a small building totaling 15,000 square feet, and 2,500 square feet of that is vacant, the calculation would be:
(2,500 x 100) ÷ 15,000 = 16.6% vacancy rate
Is Lower Better?
Once you have the vacancy rate figured out, another question could be whether lower is better. Certainly, a lower vacancy rate can signal many positive things, including high demand for that particular real estate product and/or low tenant turnover.
But you could be pursuing a value-add strategy. In this scenario, a higher vacancy rate might be more advantageous. It could mean more empty units/square footage targeted for improvement, then offered at higher rent rates.
Regardless of your investment plans or goals, the vacancy rate is an important metric to consider before investing in a particular property. Be sure to understand the current and historical vacancy rates and determine how well that asset might fit with your particular strategy.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Hypothetical examples shown are for illustrative purposes only.
Programs that depend on tenants for their revenue may suffer adverse consequences because of any financial difficulties, bankruptcy or insolvency of their tenants.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
