The vacancy rate is the number of
the stock of properties available for lease
Investors need to consider the vacancy rate of a target area. The vacancy rate is the number of untenanted properties divided by the stock of properties available for lease.
For example, if there are 15 properties empty in a particular suburb and there are a total of 500 available rental properties in the local area, the vacancy rate would be 15 / 500 x 100 = 3%
Vacancy rates are ‘in balance’ at 3% this is because there are always people between moves, houses being renovated or repaired etc., Anything less than 3% is contracting, and less than 2% is considered ‘tight’. It implies that it shouldn’t be challenging to find and keep a tenant. It may also be a predictor of the likelihood of rent rises in the future.
It is also essential to keep in mind that the vacancy rate for an area is a generic measure.
Vacancy rates can vary for different types of properties. For example, a new university opens up, and the vacancy rate for large homes with extensive gardens is 6%, which is an unattractive proposition. Still, the vacancy rate for one and two-bed apartments in the area plummet to 0.5% because of all the new students coming into the area looking for accommodation!
Townhouses may have a vacancy rate higher than apartments but way less than the houses in that area. It is vital to choose a property type that suits the predominant and changing demographic of the area.
An allowance for the vacancy rate is an essential input into a realistic cash flow analysis. Regardless of how low the vacancy rate is in an area, it is sensible to allow a minimum of 2-2.5% in the calculations to allow for tenant changeover periods.