What is the factors Affecting Vacancy Rate?

There are a number of factors affecting how often and how long a property is vacant. Some are completely controllable by the landlord, while others are mainly due to forces in the marketplace:

Economic factors such as a declining population or a rise in the local unemployment rate, caused in part by people and businesses relocating;
Competition in the form of new rental property coming to market, such as a newly built apartment building nearby or a large build-to-suit (BTS) subdivision of single-family rental properties;
Rental rates that are too high and result in higher tenant turnover with longer periods of time between tenants when renters feel they can find a better value for their money elsewhere;
Lack of demand for a specific property type, such as having too few or too many bedrooms for the market served or an outdated floor plan that does feature amenities that tenants are seeking;
Tenant maintenance requests not being promptly addressed, such as fixing a water leak that could eventually cause mold or replacing a faulty door lock that affects the safety and security of the tenant;
An understaffed or inexperienced property management company that has caused tenant dissatisfaction and declining property value due to poor upkeep and rent collection.

How Owners Can Reduce Vacancy Rate?

Reducing vacancy can help to increase property value over the long term by minimizing unnecessary tenant turnover expenses and keeping cash flow more predictable. There are a few strategies an investor can use to reduce the vacancy rate of their rental properties:

Forecast the potential demand for rental property in the market before investing to analyze rental strategies that can make renting more attractive than buying for tenants;
Develop accurate rent estimates by using free online tools such as Stessa Rent Estimate or Rentometer;
Aggressively market vacant property online and offline using sources such as Zillow, Homes.com, yard signage, and bulletin board advertising;
Use a tenant screening service to receive credit reports, background checks, and tenant rental history before signing a lease with a new tenant;
Consider hiring a property manager who is vetted and experienced;
Offer good tenants incentives for renewing the lease such as a gift card or free carpet cleaning.

Use Vacancy Rate in Other Rental Property Metrics

Vacancy rate has a direct impact on gross rental income, and the longer a property sits on the market vacant the less value it has to an investor. Other rental property calculations that are affected by vacancy rate include:

Net operating income (NOI)

Total of all income less all expenses, excluding the mortgage payment.

Rental income + Other income (such as pet rent) – Vacancy expense – Operating expenses (except mortgage payment) = Net operating income (NOI)

Capitalization rate

Ratio that compares NOI to property value or sales price.

Cap Rate = NOI / Property value

Cash flow

Cash remaining after all expenses including the mortgage have been paid.

Cash on cash return

Measures the cash income received compared to the amount of cash invested.

Cash on Cash Return = Annual pre-tax cash flow / Total cash invested

Gross rent multiplier (GRM)

Compares the gross annual rents received to the property value.

GRM = Property price / Gross annual rental income

Return on investment (ROI)

Measures the annual return of an investment compared to the total amount invested, and will vary based on the amount of cash invested, capital expenses, and the amount of leverage used to purchase a property.

ROI = Annual return / Total investment