What is the Vacancy Rate?

Explanation

  • In the real estate sector, the vacancy rate means units in a particular apartment/hotel/complex are vacant at a given specific time and available for renting purposes.Generally, this is used to calculate the rate per property and compare it with other similar properties, giving an idea and understanding of how the property is performing in the market.

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Formula

To calculate this, take the number of vacant units in the building, multiply by 100, and divide the arrived number by the total number of units.

Mathematically, the formula will be as follows: –

Vacancy Rate Formula = Vacant Units in the Building * 100 / Total Number of Units in the Building

How to Calculate?

  • Step #1 – Find out the number of vacant units in the building.Step #2 – Multiply the number in Step 1 by 100.Step #3 – Finally, divide the number arrived in Step 2 by the total number of units in the building.

Examples

Mr. Joseph is looking for a property and willing to rent it for a year. Finally, he found a cozy apartment on West Street, Colorado. While researching the area and the property, he noted that the apartment he wants to rent is part of 120 units in the building. On enquiring about other available units, he was informed that there were 8 units available for a rental basis and that people had already occupied the rest.

Based on the information above, we will calculate the vacancy rate of the building where Mr. Joseph is looking to rent an apartment.

Solution:

Information required:

  • Total number of vacant units in the building = 8Total number of units in the building = 120

Now, following the steps explained above, we apply this formula:

Vacancy Rate = Vacant Units in the Building * 100 / Total Number of Units in the Building

  • = 8 * 100 / 120= 6.67%

Vacancy Rate in Real Estate

In simple terms, the vacancy rate refers to vacant units compared to the total units available in the building. Now, this vacancy can be due to various reasons such as the property being under repair, some renovation is required, the tenant having just vacated the property, any sudden change in the economic scenario has caused the property to be cleared, the property is new in the market and recently been listed for rental.

Here, when we talk about property, one must understand that the property may refer to any of these: –

  • Residential apartmentResidential buildingFamily housesMulti-Family housesCommercial propertyFarmhouse or vacation houseAny condo

Which Factors Impact the Vacancy Rate?

  • Neighborhood in which the property lies.Age of the property.Market rent or the rent quoted for the property in questionAge or bracket of age in which the population belongs in the areaThe density of the population in the areaAccessibility to consumer and durable marketsAccessibility to the transport systemIncome level of the potential renterThe information available in the market about the propertyMatching of requirements of the potential renter and the amenities available on the property.

Importance and Uses

  • A low vacancy rate means the property is good, and many buyers or people want to rent in that building or property.It acts as an indicator of expected profitability by renting a property in a particular area.It shows whether or not people want to rent a property and will help you decide if you are planning to invest in such an area.You must keep your eyes open and inspect why the rates are so high and any other inefficiency in renting the property.

Vacancy Rate vs. Occupancy Rate

Conclusion

  • It plays an important role for property owners, as it gives a picture to them regarding the performance of their property or the industry benchmark. It provides information about the vacant units in a building or complex and thus acts as an indicator of the level of profitability.A low vacancy rate means that the units in that particular building are in demand and that people want to stay or live in that property. Whereas a high vacancy is a concern, people may not want to stay in that vicinity. Also, from the investment point of view, one may not achieve the desired returns/profits.

This article is a guide to Vacancy Rate and its definition. We discuss the vacancy rate formula, examples, and their importance and uses. You can learn more about finance from the following articles: –

  • Dogs of the DowShort Sale in Real EstateDistressed SaleLien SaleLease Rate