Before you purchase a property, it’s imperative that you assess the value of the investment, and the viability of the market. There’s a certain key indicator to consider—vacancy rate. What is a vacancy rate? This is a parameter used to find out how many units are available in a particular apartment complex, a state, or a town.
To understand what exactly a vacancy rate is, consider an apartment complex which has a vacancy rate of zero. That would mean every single unit is occupied, which indicates that the landlord set the rent too low. In that situation, a landlord or property management company should increase the rent. You should expect an occasional vacancy.
However, the objective is to keep the vacancy rate as low as possible—I aim for 4% to 5%. That means during a tenant turnover, within a couple weeks you should have a new tenant moving back into your property. You don’t want your rental sitting unoccupied for months on end.
What goes into figuring out a vacancy rate? It’s a simple equation: number of vacant properties divided by total properties available. For example, if there are 200 units available, and 20 are vacant, you’ll want to divide 20 by 200. This formula will give you a 10% vacancy rate, which I would consider too high.
There are a number of economic factors that play into vacancy rates:
In a town where there is one central employer and the employer decides to leave the town, chances are, many people will lose their jobs. That's why it is not recommended to invest in a town that has one core employer that supports that entire town’s economy.
- Economic forces and disposable income
How much income are people earning? How much are people able to save? How are the people taxed in a particular area? If everyone in a market is strapped for cash, businesses can't survive, and the rental industry is no different.
It's sensible to invest in areas where there is almost no construction going on because that will mean that there will be a demand for your rental property. In a market where there is a lot of construction work going on, the total amount of units is constantly increasing. Over time, the vacancy rate will increase and in consequence, demand for your units will reduce.
Those are the main factors that affect a vacancy rate. It is necessary to understand vacancy rates when you are buying a rental property. What is a vacancy rate in this town? What are the economic factors in this city? Those are the questions that you should ask to decide whether or not you should buy a rental property in that town.
Want to know the five cities with the highest vacancy rates? Read here.