Conversation about Vacancy being "Healthy" for an Asset

[John Acklen]

I was having a conversation the other day with a good friend of mine who is in the development and asset management world about a property I'm interested in purchasing.  The property is currently 100% occupied with several legacy tenants that are paying well below what market rents are in the area.  The landlord has never had an issue keeping it at 100% occupancy, and has actually mentioned they had a waiting list in the past for when units opened up. 

My plan is to purchase the asset and implement a few value-add strategies, such as sub-metering water, new appliance packages in the kitchens, raising all rents to market value (of course), along with some other renovations.  I mentioned to him that I was worried that by raising the legacy rents to market value (on top of billing back water/sewage), that I'd have a higher rate of vacancy while those tenant walk and while I wait to get new tenants in.  

He said something that really opened my eyes about vacancy - "A certain level of vacancy is HEALTHY for an asset, because you know you're actually getting the right amount in rent. For our assets we actually aim to have between 5-8% vacancy, because that means we're pushing the rents to the proper level." 

Maybe that's common knowledge, but it really flipped a switch in my brain.  Obviously, this isn't going to fly for smaller properties, but when you're looking at 100-200+ units, he was saying it's actually an indication of a healthy asset to have a certain level of vacancy.  

What are your guys thoughts on what a "healthy" level of vacancy is for an asset? At what level of occupancy do you believe you should begin to raise rents?