How Much Is Your Vacancy Costing You?
One of the keys to successfully owning an investment property is the ability to keep your vacancies filled with paying tenants. If a unit stays empty for too long it can seriously affect your bottom line. After all, the main goal when owning rental property is to have all the bills paid by the rent you are collecting, with hopefully a little something left over to put in your pocket. If a unit is vacant for too long you can say "bye, bye" to that goal.
So just how much is your vacancy costing you? Before I go any further, you should have a clear understanding of your market's vacancy rate. For example, the Burlington area has a less than 1% vacancy rate, which means that 1% of a property's income is lost to tenant turnover, or tenants simply not paying rent. To determine your property's vacancy rate, you need to determine that property's potential rent. This is the total annual rent if your property was 100% occupied year-round. So if you have 5 units renting for $1,000 each, then your potential rent would be ((5*1000)x12) which is $60,000/year or $5,000/month. Next, determine what you collected in rent last year. Say you only collected $55,000 because you had some maintenance you had to do before someone could move in, or some tenants didn't pay rent on time, etc., which in the end caused you to lose $5,000. To figure out your vacancy rate you simply divide the $5,000 that you lost in rent by the potential rent and multiply by 100. (($5,000/$60,000)x100) which gives you a vacancy rate of 8.33%. Now you should look at this and say, "Whoa!, my property is operating at an 8% vacancy but the rest of the market was less than 1%. What am I doing wrong?"
I have made a spreadsheet for you to look at that will allow you to see exactly how much money you can expect from a rental property in a given market. Instructions on how to use the calculator are in the spreadsheet. Basically, this calculator allows you to enter the potential rents for the property, then enter a vacancy rate (either a market rate or the rate at which you are currently operating). The cell in the bottom right corner will show your calculated annual effective gross rent. The gross rent is basically the potential rent you could be getting minus any loss due to your vacancy rate. If you input the market vacancy rate your effective gross rent will reflect the income you can expect if you are being competitive within the market. However, if you calculate the vacancy rate at which your property has been operating, and input that percentage into the calculator, it will show you the total loss due to vacancy for the year and averaged for each month, as well as an expected effective gross rent for the year for that vacancy rate.
I hope this helps everyone get a firm grasp on why it is so important to monitor your properties' vacancy rate. Please subscribe to the blog if you like what you are reading, and feel free to comment with any questions - I will gladly provide you with an answer!