Physical vacancy versus economic vacancy
Physical vacancy counts empty units. Economic vacancy counts lost dollars, which is the number that actually matters, and it is always larger. It includes the empty months, but also concessions like a free first month, rent that was billed and never collected, non-revenue units occupied by an on-site manager, and the difference between asking rent and what tenants would sign for. A building can be fully occupied on paper and still run 10% economic vacancy if half the tenants are behind. When a seller quotes vacancy, ask which one they are quoting and then verify against deposits.
How to budget it honestly
Use the submarket, not the metro, and prefer observed rather than advertised figures. For a single-family rental, thinking in turnovers is clearer than thinking in percentages: if you expect a tenant to stay three years and each turnover costs six weeks of rent plus make-ready, you can price that directly and convert it to an annual allowance. Then stress it. A deal that only works at 3% vacancy in a submarket that runs 8% is not conservative, and the difference is usually the entire cash flow line.
Vacancy rate = vacant unit-days ÷ total available unit-days × 100. In dollars: vacancy loss = gross potential rent × vacancy rate. A 6% allowance on $18,000 of potential rent is $1,080.
What drives it
Price relative to the submarket is the first driver — a unit listed above what comparable units rent for creates its own vacancy, and every week spent holding out for an extra $50 costs more than the increase gains. Turnover is second: each move-out means make-ready cost plus downtime, so tenant retention is a vacancy strategy. After that come market conditions, unit quality, seasonality in cold-weather markets, and screening, since a fast placement that ends in an eviction produces far more vacancy than a slower, better one. Local law affects the math too, because notice periods and eviction timelines vary by state.
Reducing it
The cheapest vacancy is the one that never happens. Price at market rather than above it, start renewal conversations sixty days out, respond to maintenance quickly enough that good tenants stay, and schedule make-ready work before the unit is empty rather than after. When a turnover does come, overlapping the listing with the notice period is usually worth more than any rent increase you were considering. Screening quality matters too, because the cost of a bad tenancy shows up as vacancy long before it shows up anywhere else.
Put it to work
Related terms
- Break-even occupancy — The occupancy level at which rent exactly covers operating expenses plus debt service — the line between cash flow and a cash call.
- Operating expense ratio — Operating expenses divided by gross operating income, shown as a percent.
- Pro forma — A projected income and expense statement for a property — what it should do, not what it has done.
- Rent roll — A unit-by-unit schedule of who rents what, for how much, on what lease term, with deposits and move-in dates.
- NOI (net operating income) — Annual rental income minus all operating expenses, but before mortgage payments and income taxes.