What is Vacancy Rate?
Vacancy Rate means the number of units available on rental basis which are vacant or unoccupied in an apartment, building, complex, hotels, or colony, at a given time period and the same being expressed in percentage terms. In other words, it is exactly the opposite of the occupancy rate.
Explanation
- In the real estate sector, the vacancy rate means that there are units in the particular apartment/hotel/complex which are vacant at a given particular time and are available for renting purpose.
- Generally, this is used to calculate the rate per property and compared it with other similar properties, which gives an idea and understanding as to how the property is performing in the market.
Formula
In order to calculate this, take the number of units lying vacant in the building, multiply with 100, and divide the arrived number by the total number of units in the building.
Mathematically, the formula will be as follows:
How to Calculate?
- Step #1 – Find out the number of vacant units in the building.
- Step #2 – Multiply the number in Step 1 with 100.
- Step #3 – Finally, divide the number arrived in step 2 with the total number of units in the building.
Examples
Mr. Joseph is on the lookout of property and willing to rent it for a year’s timeframe. He found a really cozy apartment in West street, Colorado. While doing his research about the area and the property, he noted that the apartment which he wants to rent is part of 120 units in the building. On enquiring about any other units being available, he was informed that there is a total of 8 units that are available for a rental basis and that the rest are already occupied by people.
Now, based on the information given above, please calculate the vacancy rate of the building where Joseph is looking to rent an apartment.
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Solution:
Information required
- Total number of vacant units in the building = 8
- Total number of units in the building = 120
Now, following the steps as explained above, we apply this formula,
- = 8 * 100 / 120
- = 6.67%
Vacancy Rate in Real Estate
The vacancy rate, in simple terms, refers to the rate of 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 has just vacated the property, any sudden change in the economic scenario has caused the property to be vacated, the property is new in the market and recently been listed for rental.
Here, when we talk about property, it needs to be understood that the property may refer to any of the following:
- Residential Apartment
- Residential Building
- Family Houses
- Multi-Family Houses
- Commercial Property
- Farmhouse or Vacation House
- Any kind of Condo
Which Factors Impact the Vacancy Rate?
- Neighborhood in which the property lies.
- Age of the property.
- Market rent viz a viz the rent quoted for the property in question.
- Age or bracket of age in which the population belonging in the area falls in.
- The density of population in the area;
- Accessibility to consumer and durable markets;
- Accessibility to the transport system.
- Income level of the potential renter;
- The information available in the market about the property.
- Matching of requirements of the potential renter and the amenities available in the property;
Importance and Uses
- A low vacancy rate means the property is good and there are a lot of buyers or people who are wanting to rent in that building or property;
- This acts as an indicator of expected profitability by renting a property in a particular area;
- It shows whether or not people are wanting to rent in a property, and will help you decide if you are planning for investment in such area;
- It requires you to keep your eyes open and inspect as to why the rates are so high and any other inefficiency that may exist in renting the property.
Vacancy Rate vs. Occupancy Rate
| Vacancy Rate | Occupancy Rate | |
| The number of units vacant or unoccupied in a building. | The number of units occupied in a building. | |
| Formula = Vacant Units * 100 / Total Units | Formula = Occupied Units * 100 OR =100% – Vacancy % |
|
| Used for Making Investment Decisions. | Provides Information on Income and Profitability of the Portfolio. |
Conclusion
- This plays an important role for the property owners, as it gives a picture to them regarding the performance of their property viz a viz the industry benchmark. It gives information about the units which are lying vacant in a building or complex and thus act as an indicator of the level of profitability.
- Having a low vacancy rate means that the units in that particular building are in demand, that people are wanting to stay or live in that property. Whereas a high vacancy is a concern, which means people may not be wanting to stay in that vicinity. Also, from the investment point of view, the desired returns/profits may not be achieved.
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