Real Vacancy Factor

[Wendell De Guzman]

After owning a bunch of rental properties, I realized that for Single Family Homes, your real vacancy factor is not necessarily 10%. Why? If you have a mortgage on the house, logically then, if it becomes vacant, you will pay MORE vs. if the house is free and clear. Based on a spreadsheet I created, a $150K property with a $120K mortgage will have 17.62% vacancy factor (assuming it's vacant 2 months in 1 year) whereas if it does not have any mortgage, the real vacancy factor drops to 10.46% (of course the actual numbers will depend on the real estate taxes and other costs but apples-to-apples comparison makes me question the basis of the 10% vacancy factor). I uploaded the spreadsheet in the Fileplace.
The screen shot of the spreadsheet becomes too small if I include the whole thing so I am breaking the spreadsheet into 2 parts: cost of vacancy and the resulting vacancy factor. My question is: how do you really calculate the vacancy factor? I know the basis of the 10% is probably long term average but then again, it does not factor the real cost of a vacancy when you have a mortgage on the property. What am I missing? Does my analysis make sense?

Cost of vacancy (with mortgage)

Vacancy factor (with mortgage)

Cost of vacancy (with NO mortgage)

Vacancy factor (with NO mortgage)

[Michael Seeker]

Wow...that is some in-depth analysis. How I calculate vacancy factor is I buy in high-demand areas. Vacancy is ~0%.

As for the factor itself...it doesn't matter if you're leveraged or not. Vacancy is the % of the year you can expect the unit to be empty. 1.2 months per year is always 10% regardless of whether you have 100% financing or own free and clear.

I used to use a rough estimate of 10% because banks want to see something when you apply for a loan...however once you get to know an area and the type of property you're investing in you'll be able to narrow this down pretty easily. If you're buying all over the place, then I'd say you should expect vacancy rate to be pretty well correlated to CAP rate (low CAP rate, low/no vacancy. high CAP rate, high vacancy).