Understanding Vacancy Rate
One fact that you’ll need to consider when developing your rent estimate is the vacancy rate, both for the properties you manage and for properties throughout the local market. You’ll want to crunch the numbers from a variety of sources to come up with a vacancy rate that is aligned with the properties that are most comparable to your own. You can also put the vacancy rate to work to find out how to optimize your properties for more consistent return on investment.
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Making the numbers work when you are managing a rental property requires you to have your property rented consistently at a maximized rental rate. How, then, do you determine the right rental rate for your property and identify the factors that reduce vacancies? By understanding your vacancy rate, and evaluating the average vacancy rate for comparable properties in your local market, you can create more accurate rent estimates and optimize your property for more consistent cash flow.
In order to determine your vacancy rate, you’ll need to first know how to calculate it. You’ll be able to make some decisions based on tracking the vacancy rate of your current properties over time. However, in order to make your analysis even more effective, you’ll want to put in the additional effort to gather data and calculate vacancy rates for comparable properties, as well. That will allow you to make even better decisions to optimize the value and marketability of the properties you manage.
How do you calculate the vacancy rate?
Unless you were one of the lucky few for whom math was a favorite subject in school, you may be intimidated by calculations, especially when they affect the properties you manage and their potential cash flow. The good news is that calculating your vacancy rate is quite simple.
In order to determine your vacancy rate, simply multiply your number of vacant units by 100, then divide by the total number of units you own or manage. This gives you a number to express as a percentage. That percentage is your vacancy rate. Do the same calculation with occupied units in order to find your occupancy rate. In order to check your work, add your vacancy rate to your occupancy rate; the total should add up to 100%.
How can you determine the local vacancy rate for properties in your area?
While calculating your own vacancy rate is quite simple, it may be more difficult to determine the vacancy rates for properties in your local market.
Here are a few sources of information:
Census
Both annually and quarterly, the US Census Bureau publishes statistics for homeownership rates and rental vacancy rates for communities throughout the country. In addition, this publication provides characteristics for vacant units in the area. While this information may help to give you an overall idea of vacancy rates in your market, it may do little to help you determine which of those units are truly comparable to your vacant properties.
Real Estate Professionals
If you are a real estate agent or broker, or if you are an investor who works with a real estate professional, you may be able to ask for information on comparable properties in your area, including which ones are available as current rental listings. This may require a fair amount of data gathering and analysis on your part and may not give you a good idea of the change in availability over time.
Real Estate Associations
Your local, county, or state real estate association may publish statistics on their website. These may include the total number of units available for rent and the current vacancy or occupancy rates. However, they may do little to help you determine which of these vacancies are comparable to your own properties.
Property Managers
If you have a fair idea of which properties in your area would qualify as comps, you may want to reach out to their property manager or management company in order to ask about their vacancy rates. They may or may not be willing to share this information with you, however.
Local Government
Your local or county government may publish vacancy rates for your area. However, this data may also include other types of vacant and abandoned properties, not just active vacancies, and may do little to help you identify which properties are comps for yours.
How can the local vacancy rate help you create more effective rent estimates?
By determining your vacancy rate, you can consider factors that may be affecting your properties and resulting in vacancies. In addition, you can track the length of vacancies and your average vacancy rate over time in order to determine if you need to make changes to keep your properties rented more consistently. You may be able to extrapolate all of this information based on the characteristics of your own properties, tenant feedback and your general knowledge of the local market.
By determining overall vacancy rates for comparable properties in your area, however, you can begin to understand much more. You can determine whether your properties are underutilized or outperforming similar properties. You can develop better rent estimates and align your rental rates with those of comparable properties in your market. You can understand how management strategies and marketing platforms affect vacancies in properties like yours.
Vacancy rate is, therefore, a valuable metric that can help make your properties more competitive and help you make better decisions about their management, improvement, and other factors. As you continue to track it and evaluate it over time, you’ll develop more sophisticated insights into what works, and doesn’t work, for your properties and your market.
How can the local vacancy rate help you manage your properties more effectively?
There are a variety of ways to use your vacancy rate to implement and improve your management. The first step in improving the performance of your rental property is knowing that there’s a problem to address. That’s what the vacancy rate allows you to do.
Evaluate property features
When you compare the vacancy rate of the properties you manage with that of comparable properties, you are able to evaluate those features that are either paying dividends or holding you back from being competitive in your market. Has another property owner put time and money into updates? The result may be showing in a lower vacancy rate for his or her comparable properties.
Remember, property features are not limited to fixtures and features of an individual residence. Property features may include amenities, like a neighborhood playground, or services, like paid water, sewer, lawn care, and pest control. Find out what extras are common for properties in your area and determine whether you should make changes to your service offerings.
When you add vacancy rate to an evaluation of comparable rental rates, you can improve your rent estimate and determine what features potential tenants will expect for the rents you’re charging. In addition, you can see how smart upgrades, services and improvements can add value to the bottom line.
Predict market shifts
Are you seeing increasing vacancy rates in your market or in a nearby micro-market? This may be an early indicator of a shift in property values and desirability that could affect the properties you own or manage. This type of shift may be temporary, in the case of a brief economic disruption, or ongoing, in the case of the loss of a major local employer. In either case, you can’t prepare for what you don’t foresee, so it’s essential to follow the numbers in order to adjust as needed.
In addition, ongoing tracking of vacancy rates may help you evaluate how your market changes with the introduction of new commercial or residential development. For example, if a new multi-use commercial development opens in the area, this may impact how desirable your rental units are considered. If you’re close to the new development, you may want to reflect that in your messaging and branding.
Plan long-term
Vacancy rates can provide an early warning sign of long-term changes to your market or to the properties you manage. An increasing vacancy rate may indicate the need for updates and upgrades or may indicate the potential for a declining market in the years ahead. In either case, this is valuable information that can help you determine whether to put more money into improvements or to begin thinking about a change in investment strategy.
You can’t afford to shut down all of your properties at once in order to make needed repairs, updates and upgrades. You need a systematic approach, allowing you to get ahead of changes and predict the associated costs. Long-term planning allows you to create a winning strategy to update and implement needed changes over time without increasing the vacancy rate or interrupting the cash flow.
How can you reduce the vacancy rate for your properties?
While a rise in vacancy rates can be an indicator of large market shifts, it can also be an indication that you need to change some aspects of your management strategy. Track your vacancy rate as you make changes so that you can determine what factors have the most positive effect on occupancy.
Application requirements
Do you have property requirements in place for renters that may be frightening away great potential tenants? It may be a good idea to look at your requirements and think about changes that would broaden your base. Welcoming pets may make your properties an option for responsible and reliable local pet owners. Providing lawn care services may make your properties a possibility for tenants with disabilities or for elderly tenants.
Tenant onboarding
Do you need to rethink your tenant onboarding process? Do you need to better set up expectations for tenants or make your services more accessible for them? Should you spend more time communicating with your tenants early in order to help ensure that they are comfortable in the property and in their new community? A better onboarding process can help connect your tenants to the property, improving their experience and keeping them around longer.
Marketing strategies
Perhaps you are not seeing enough new tenants because they don’t know about your properties. Are your old ways of marketing ineffective? Do you need a more robust online presence? Are you properly utilizing free resources like social media platforms to increase your property’s visibility? New marketing strategies may help you get your property in front of a host of new possible tenants.
Create branding
It may be in your interest to create a cohesive branding strategy for your properties in order to emphasize the benefits of renting with you. This can help you to more effectively market your individual properties, by tying them to a variety of desirable local neighborhoods or amenities. In addition, it may help you keep properties full by letting existing tenants know that if they outgrow their current rental, you have other options available to them.
Tenant retention
Tenant retention should be an ongoing focus for you and it starts with the service you provide. When you communicate regularly, make repairs in a timely and efficient manner, and ensure tenant satisfaction, you keep vacancies low and encourage tenants to renew their leases and stay with you longer. In addition, you create marketing opportunities as your satisfied tenants share their positive experiences with friends and family members.
RentSpree can help you evaluate your local vacancy rate and create more effective strategies to recruit and retain exceptional tenants. The RentSpree rent estimate report helps you crunch the numbers and make better decisions every day by providing the data you need on your local market and comparable properties.
Data is meaningless without the details and insight to put it to work. RentSpree’s Rent Estimate report doesn’t just provide additional numbers. It helps you more easily evaluate those numbers to identify the trends that can make you a more effective and efficient property manager. This information is about more than a simple calculation. Understanding the vacancy rate means understanding how to maximize the value of your properties and refine your processes month after month.
Continue to Chapter 4: Rental Market Saturation or jump to a different article.
