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How to Calculate Vacancy in Your Rental Properties

calculate vacancy

Summary: Vacancy rate is an important component of the cash-on-cash calculator. However, most people don’t know how to calculate it correctly. In this article, we discuss two ways to calculate vacancy and why it’s important to take into consideration both when analyzing deals.  


When a property is vacant, it’s exactly like it sounds. There’s nobody occupying the unit or paying you rent. 

But that doesn’t capture the whole picture. What if you give a tenant one month of free rent? During this month, the unit isn’t vacant but you aren’t collecting any rent. 

So what’s the right answer? Is vacancy when your unit is empty, or is it when you don’t get any rent?

How about both?

There are actually two types of vacancy and both are important to consider when analyzing rental properties for cashflow. 


Physical Vacancy

The first is called physical vacancy.

Physical vacancy is when your unit is sitting completely empty and you aren’t collecting any rent. It’s the time period between tenants, when one moves out and another moves in. 


How do you calculate physical vacancy?

You take the total time it is empty divided by the total available time it could be occupied. This can be calculated in days or weeks. 

For example, let’s say that a tenant moves out and it takes 3 weeks or exactly 21 days to get a new tenant in the unit. 

Physical vacancy = 3 weeks divided by 52 weeks (5.8%) or 21 divided by 365 (5.8%)


Economic Vacancy

The second type of vacancy is called economic vacancy.

This exists whenever you don’t collect market rent and as in the example above, it doesn’t matter if there’s a tenant occupying the unit or not. 

There are a lot of reasons why you might not be collecting market rent. 

The most common is when the unit is vacant between tenants. 

Another reason is when you rent a unit below-market rent. This might happen because you are rushing to get a unit rented and lower the rent to get it rented up quickly.

In some markets where the rental market is slow or in the event of a downturn, you might have to give tenants sweeteners to choose your unit over another. For example, you might offer one month of rent for free. Or maybe you throw in a storage unit that you normally rent, which would be another example of economic vacancy.

There are a whole host of other reasons why you might get below-market rents. If you come across any, just be sure to include it in your calculation of economic vacancy.


So how do you calculate economic vacancy?

The calculation is a little different than physical vacancy.

The key to calculating it is to first determine your total possible market rent (gross potential rent). So this includes the market rent for your unit, but it could also include money you get from a storage unit or maybe even utility charge-backs.

Let’s say that the gross potential rent is $25,000. 

Now you calculate your lost rent. Let’s say that you had a few weeks of vacancy, some utility chargebacks you failed to collect and a storage unit sat empty for 6 months and the total lost rent was $2,500.

Economic vacancy = Lost Rent divided by Gross Potential Rent or $2,500 divided by $25,000 or 10%

As you can see, economic vacancy is a very different calculation than physical vacancy and when calculating your cash-on-cash return, economic vacancy will give you a more accurate picture of the financial performance of your rental property. 

So there you have it, the two types of vacancy and how to calculate both!

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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