whats a good vacancy rate?

Question

The area i am particularly interested in has a 8.8% vacancy rate...is it too high,average or low?

David Beard · Answer

I had put this together to tell me if it truly makes sense in my C+/B- areas to set rents a little below market to extend tenancy.  I took away from it that if I lower rents by $50/mth, I would have to increase avg tenancy from 2 years to 4 years to recoup this and come out moderately ahead.  I would be skeptical  that $50 less per month will keep someone in a unit an additional 2 years, so it seems that staying at market rents makes sense.

However, if it takes you 2 mths to fill a unit at market, and the $50 savings can cut this to 1 mth and extend the tenancy from 2 yrs to 3 yrs, then you come out ahead by .5% per year on the net return.

Likewise, if you raise rents to $50 above market and it reduces avg tenancy to 1 year, you're hosed.

Mostly this is intuitive, of course, just the degree of the numbers I was interested in.  This assumes PM managed with 1/2 mth fee to lease a unit and $750 avg turnover costs (includes the occasional severe turn).  If you do all this work personally, you have taken on a job and should pay yourself accordingly, so I think the answer is the same.

Account Closed · Answer

haha... where's the smart @$$ button??

Steve Babiak · Answer

William Bannister - It doesn't take any effort to get to the building to 90% vacancy; but I bet it's lots of hard work to get to 90% occupancy. :)

Rachel Marie Shelley · Answer

The lower the better. The market I'm currently in is out-of-state and less than 3% vacancy. Mortgages are some of the lowest in the nation, but it's a solid blue collar location with longtime owners/tenants. More owners than renters... My father inherited property in the Midwest where the tenants had been there since the 80s. His last turnover was about 10 years ago in one of the units of his duplex.

My niche: Midwest suburbia is generally a good place to start looking if you are interested in inexpensive real estate with a solid working core and lower vacancy rates. The closer you get to bigger populations, especially big cities, vacancy rates do tend to increase due to transiency. My sweet spot is within a 1/2 hour from a big city. I like commuters because they're interested in cheaper living but living close enough to the action and good jobs. They're also less picky and less likely to be litigious due to income and general acceptance that life isn't perfect. (Not a perfect formula... but a decent one.) I'd say, try to keep your vacancy rate locations below 6% and preferably below 5%. Again, the lower the better. But hey, investments can be successful wherever you are as long as your team is prepared to get on the ball when your tenant flies the coop.

Good luck.

Account Closed · Answer

@Rich Weese
only from my reading of different texts, would that low a vacancy imply that your rental rates are below market rate and could prolly be raised?  at least that's what i've read from a few books on vacancy for multifam.

Pat L. · Answer

On our SFH's our agent has a waiting list bec of the school district(s).

Rich Weese · Answer

My self storage units in Florida have been running approximately 15 to 18% vacancy.

My hundred and 154 unit apartment building in Garland Texas has been running under 2% for at least the past year.

My single-family residences in Texas, Arizona, and Utah have been running less than 1% for the past year.

Joel Owens · Answer

Vacancy depends on the area and what is happening with the local market.

Someone could have 100% occupancy but upon analyzing the market there are short sales and foreclosures happening on other buildings. These buyers are buying cheaper with less debt service. Their goal is to turn the property around by offering rehabbed units at slightly below market rates for fast lease up and stabilization. As soon as that happens over the next few years they will bring close to market rents and hold or sell off and exchange into a larger property or properties.

So you could be 100% and the boom lose a bunch of tenants to newly rehabbed units by another owner at a cheaper price. Also of concern is the building permits and projects for the area. If a bunch of new apartment buildings are going up with amenities etc. the market could get over saturated and incur a bubble in the next few years. This would cause your rent increases to possibly be affected or put pressure for a slight rent drop in the market as landlords compete for the available tenant supply.

Yet another factor affecting vacancy is how you will be buying the property. If not all cash you will be relying on a lender whether that is hard money, private money, or conventional financing. The project you are looking at might claim 5% vacancy and the books confirm it. The lenders however show data that the average vacancy is 12% for the area. So the lender feels the seller is an exceptional owner operator to achieve above local market vacancy rates. The lender bases the cash flow model off of the 12% vacancy and adding in so much per door for advertising for lending purposes because in case of default those are the numbers they expect the property to run at managing as an absentee owner.

Cody L. · Answer

TOTALLY market dependent.  In our area of Montrose, our vacancy is actually less than 0%.  Meaning our rent collected on some properties, exceeds our rent roll.  This is typically because we stay full and occasionally have someone break a lease, giving up their deposit, and we get someone else in quickly.

On the flip side I have properties I've bought in bad areas where I know vacancy will be a problem, however they were priced with that in mind.  Some of them would be rocking and rolling if I keep them above 50%

Curtis Gabhart · Answer

Vacancy is different in each market and even each sub market.
I would focus on your net operating income vs. just  your vacancy since 90% vacancy is fine IF you are getting the return you want.

whats a good vacancy rate?

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