Vacancy Rate: What to Budget for an Empty Rental

Vacancy rate is the share of the year a rental brings in no rent, because it is empty between tenants. Budgeting zero for it is the fastest way to turn a deal that looked profitable into one that is not.

The formula

Vacancy rate = Days vacant in the year / 365

As a budget line, most investors reserve 5% to 8% of gross rent. On US$1,450 a month that is US$73 to US$116 a month set aside.

An example

A tenant moves out and the unit takes six weeks to turn and re-let. That is 42 days, or 11.5% of the year. Well above a 5% budget. Over a three-year hold with one such turnover, the average works out to about 3.8% a year, which a 5% reserve covers comfortably.

The reserve is not about any single year. It is about the year a turnover happens not being the year the deal breaks.

What rate to use

• Stable, high-demand area, long-term tenant in place: 4% to 5%
• Typical single-family rental: 5% to 8%
• Higher-turnover areas, student or workforce housing: 8% to 12%

Local data beats a rule of thumb. A property manager working that specific submarket will tell you real days-on-market for rentals, and that is worth asking for before you buy.

Turnover costs more than the lost rent

The empty weeks are only part of it. Each turnover typically also brings:

• Paint and cleaning: US$500 – US$1,500
• Minor repairs the outgoing tenant caused or revealed
• A letting fee, often half a month's to a full month's rent, if a manager places the tenant
• Your time, or more of your manager's

This is why a slightly below-market rent that keeps a good tenant for five years frequently beats pushing for the top number and turning over every eighteen months.

Related reading

The calculator applies a vacancy allowance by default rather than letting you forget it. For managing this from a distance, see how to find a property manager and the out-of-state investing checklist.