Vacancy rate: This term denotes the percentage of a year that a property will sit empty. It is a very important calculation to include in your numbers when you buy a rental property, but it is also an “average” number that you should consider when determining the best location in which to purchase a rental property.
Buying in an area with a high average vacancy rate means that your property will likely be vacant more often. Because vacancy is one of the most costly expenses for a landlord, it would make sense that you would want to buy in areas with below-average vacancy rates.
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So how do you find an area’s average vacancy rate? There are three different approaches to finding this data:
The U.S. Census Bureau tracks vacancy rates with data points in many areas of the country, including the largest 75 markets in the country. This data is fairly “raw” and will require you to download information to a spreadsheet to analyze it. This data also
does not get down to the level of specific neighborhoods, which can dramatically affect the vacancy rate.
If your specific location uses real estate agents to fill vacant units, you can call in a favor and ask a real estate agent to conduct a comparative market analysis on local rental property stats. This can show you how long currently available properties on the MLS have been vacant. This will also show you how long properties sat before being rented, original listing prices versus rented prices, and other data points.
3. Property Managers/Landlords
The third—and in my opinion, best—approach to finding an area’s vacancy rate is by calling up a local property manager or large landlord (in number of units, not body fat!) and asking them. They should know this number off the top of their head and can probably give you a more accurate picture than either of the other options listed here. Property managers can tell you specifics about which streets or neighborhoods have a higher or lower vacancy, as well as other nuances about locations.
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In addition, this gives you the chance to interview some property managers on the phone in case you decide you want to hire one to watch over your investment.
What is a good vacancy rate? The truth is that there is no standard right or wrong number, but according to the U.S. Census Bureau, in 2014, the nationwide average was 7.6%, compared with a record high of 10.6% in 2009 and record low of 5.0% in 1981. Your area will likely have a different number, and honestly, that’s OK. No matter what the vacancy rate is for your area, the truth is this: make sure you incorporate this vacancy rate into your analysis.
Furthermore, know that vacancy rates are largely affected by the way you manage a property. I’ll talk more about the specifics of lowering your vacancy rates later in this book, but consider this: the average vacancy rate in my area hovers around 6%–8%, but in my company, we run under 2% all year round. Of course, when I analyze a deal, I am sure to include a 6%–8% vacancy rate, knowing that I will not always be the one managing my properties so efficiently.
What’s your preferred method of finding out vacancy rates?