I haven’t ever owned a property, how would I go about determining realistically the vacancy factor on a prospective property? Just a wild guess overestimated guess to be safe?
For ex. Realdata.com says:
" 1. Vacancy
– Let’s begin with a simple one. What percentage of the property’s total potential gross income is being lost to vacancy? Start off by collecting some market data, so you will know what is typical for that type of property in that particular location. Does the property you own or may buy differ very much from the norm? Obviously, much higher vacancy is not good news and you want to find out why. But if vacancy is far less than the market, that may mean the rents are too low. If you’re the owner, this is an issue you need to deal with. If you’re a potential buyer, this may signal an opportunity to acquire the property and then create value through higher rents."
How DO you collect this “market data” and wouldn’t you think if the vacancy.was high and the price had something to do with it it would be that it was too high and not low? I mean, if a price was to drive me away from a place leaving it VACANT, it would be because it was high no? Again, I know almost nothing about rei, and I’ve read through a few books from b&n I have purchased. Anyway, thanks…
We have a simple paper calendar on the wall. Every Monday morning we count up how many rentable units there are. We don’t count units that are off the market due to renovation or repair. Then we next ask ourselves “How many units are getting rent paid for today, this Monday?”
We divide one number by the other to determine our “occupancy rate” rather than vacancy. We think positive.
Now we also determine occupancy rates on studios/1 bedrooms and 2/3 bedrooms. That’s how we figured out that most of our vacancy was occurring on the bigger units. People were more willing/able to rent the smaller units.
We have been doing this now for several years. The Monday rent rolls determines the quarterly and then yearly occupancy rate, a very important number for making business decisions.
Thanks furnishedowner. Im talking about for prospective properties. Im shopping for my 1st home which I plan to double as my first real estate investment property, which a duplex seems like a great first choice. I was thinking off the top of my head for a person in my situation starting out small, I should check a few local listings sources, cl, rent.com, and just driving around(checking “for rent” signs), especially since I do delivery work around town.
so that’s where I am. I’m trying to get an idea about how the property would perform so along with researching vacancy, what other factors do investors work with that I should concern myself with? The easy part is determining just the overall quality of the neighborhood which usually coincides with the data I believe it’s neighborhoodscouts.com provides on factors like crime rate and appreciation. I’m considering subscribing to that site but i’m still trying to get a good idea of what resources people in my situation use. I just need a point or two in the right direction. Thanks again.
Vacancy rates are very market driven. They are affected by local jobs, the supply of rental units, rental rates, location, condition etc. So it is not going to be very specific to get a national vacancy rate average.
I would recommend calling a few local real estate appraisers and ask them your question. There shouldn’t be a charge since they will know rates off of the top of their heads. Another source of information would be local property management companies. If you explain why you need the information, and perhaps ask for some information about their services and rates, no doubt they will not think twice about helping you out.
I would just use 10% as your vacancy rate. Then you should be safe in all your calculations.
Good luck with your first project.
Really? just ten percent? It sounds like an exact figure isn’t really sought on this. Is it more of a matter of other factors that the investor controls, like advertising and maintenance?
I appreciate the advice johnallenmiller, but I probably won’t try that as most people don’t want to be bugged by those seeking free things. Well, I won’t go through the yellow pages, well, google maps now, and call businesses one by one though I’ll keep my question and others on hand as I run into a lot of business customers during lunch at my work, Jimmy johns, “freaky fast”, and inquire away. Actually, calling property management co.'s isn’t a bad idea on the pretense of inquiring about their services because i’m actually going to be shopping for such a company before I get my 1st tenant so I’ll do that.
And I’ll keep looking. I keep feeling like somewhere out there among public data like crime rates and appreciation there is a source for data dealing with vacancy rates.
What furnishedowner mentioned to you is a pretty common estimate to use for vacancy. 10% would be about one month out of the year vacant. If you have tenants stay longer, great - that number will be lower for you. Just figure most people should be giving a 30 day notice when they leave their current place. If people have really long vacancy periods (this is assuming the property is marketable and ready to move in), they’re probably asking too much for the rent. Find out what your market will support for a certain type of house in that area and price yours accordingly. Holding out for an extra $50/month is really pretty dumb IMO because that extra vacant period will eat up the extra money you might get if you find the right person willing to pay the higher price.
Vacancy is not the only factor you need to consider. Though it is an important one, if the property does not cash flow then the vacancy rate is kind of a mute point. Here is a good way to analyze an investment property:
Monthly rent at 100% occupancy x 12 months
Subtract a 10% vacancy rate = Total Estimated Gross Annual Income
Subtract 50% for expenses like management, maintenance, replacement reserves, utilities (the ones paid by the owner), real estate taxes and insurance = Net Operating Income
Now figure out what your mortgage payment is going to be. There are a lot of sites that have mortgage calculators. Take your payment and multiply by 12 months to see the annual amount.
Subtract that from your NOI = Net Income before Tax (i.e. what you get to put in your pocket.)
If this number works for you then great! If you end up in the red, do not pinch the numbers to make it work. Leave the property and find one that will work. Good luck!
Great info. Thanks a lot.
I find it interesting you guys figure only a ten percent vacancy because I see, at least here in swfl, fort Myers to be exact, for rent signs up for longer than a month. I’ll start paying more attention but for some reason i’m thinking the typical rental goes vacant around say 20-25% of the time. But what do I know? Maybe that’s because these rentals i’m observing are owner managed uh?
When you have several properties, some will have people stay there for years. Overall ten percent is probably a pretty good average estimate.
For your first rental property, if you will be managing yourself, use two months vacancy if you are charging market rent. If you are offering a rent below market, use one month vacancy. Actual vacancy with a single unit is nearly always a full month or multiples of a full month. The reason is that most leases start on the first of the month and end at the end of a month. Tenants move out at the end of the month. Now you have to get in, make repairs, and begin showing the property.
If you get a prospective tenant, they have to give their current landlord notice, which means that your tenant will not be moving in immediately, but rather at the beginning of the next month. Now you have up to two months vacancy on a turnover.
As you gain experience, and more properties, you can use your own historicial vacancy rate in your cash flow analysis. Just keep in mind that the 5% and 10% numbers some suggest is becuase that is the average vacancy over a large number of properties. When you only have one property, just use one or two months as your vacancy rate and adjust as your market dictates.