‘To Let' is not a happy sign for the property owner. This represents a property, which is not earning income for the period it is unoccupied. As a property owner or landlord part of the financial preparation (in fact, the first step) involves awareness of rental vacancy. What is rental vacancy rate? How is it calculated? How does it affect you and your income?
A vacancy of a residential unit occurs when an unoccupied unit becomes available for rent or sale. It occurs when the current occupant moves out, or the unit is placed on the real estate market for future leases and ends when the unit is taken up for rent or the unit is taken off the real estate market.
A vacancy can be of two types:
- Market vacancy is the number of housing units open for rent.
- Economic vacancy is the number of housing units, which are not generating any income by way of rent such as model units, manager's unit, etc and not just the vacant units.
Credit loss is when an occupied unit does not yield income, i.e. a tenant not paying rent for a period would yield credit loss.
Owners of properties would naturally be concerned about the economic vacancy rather than the market one.
The vacancy rate is the percentage of all units in a defined area which are lying unoccupied at any point in time and is representative of the demand for property in that area. Higher rents indicate a higher demand for rental units, and would therefore lead to increased real estate value. Higher rents would normally mean low vacancy rates and lower probability of getting reasonable housing.
Vacancy rate can be calculated as a percentage, by dividing the vacancy and credit loss amount by the potential rental income.
An example will illustrate this better. You have information, from either the market or vacancy statistics, which you have purchased, that the dollar value of the vacancy and the credit loss was $53,500. The information available on the potential rental income of that area is $ 925,750. In this scenario, the vacancy rate would be calculated as ($ 53,500/ $925,750)*100. The resultant rate would be 5.7% or 6% (rounded off to the nearest percentage).
Rental vacancy rates change depending on two primary variables -the frequency at which the vacancies arise and the duration of each vacancy.
Mathematically, this relationship can be represented as:
Rental Vacancy rate = average length of the vacancies * frequency of incidence of the vacancies.
The second variable, the frequency, will depend on the tenant population's mobility and the rate of addition of rental units to the market (construction rate in the area). The average length of the vacancies will depend on the size of the rental advantage that a tenant has on the rate between available rental units, diverse nature of the available units, the rent levels as against the income of the potential tenant and the cost of the landlord, etc.
For all rental properties, there is a natural vacancy rate, that which is a result of the normal rental unit turnover rates and the normal search times for rental units.
Calculating rental vacancy rates is just one part of realty and interpreting these for decision-making is necessary for better management.