Vacancy Rate
The percentage of available rental units or space that is unoccupied at a given time.
Definition
Vacancy rate is the percentage of rental units in a property (or market) that are currently unoccupied. A 5% vacancy rate means 5% of units are empty and generating no income. Lower vacancy rates indicate strong rental demand; higher rates signal oversupply or a weaker rental market.
In underwriting, investors apply a vacancy factor to gross potential rent to calculate effective gross income. Using a realistic vacancy rate is critical — projecting 0% vacancy produces fictional results. Market vacancy rates (from local property management companies or market data) typically run 3–7% in healthy markets and 10–15%+ in oversupplied or economically distressed markets.
Investors control vacancy through property quality, competitive pricing, strong management, and market selection. A single-family rental in a strong school district often experiences very low vacancy because tenants value stability. A Class C apartment in a declining area may struggle chronically with high vacancy regardless of management quality.
Related Terms
Net Operating Income (NOI)
A property's total income minus all operating expenses, before mortgage payments and taxes.
Cash Flow
The money left over each month after all property-related income and expenses are accounted for.
Pro Forma
A financial projection document showing expected income, expenses, and returns for an investment property.
Buy-and-Hold
An investment strategy of purchasing property and holding it long-term for rental income and appreciation.
Cap Rate
Capitalization rate — the ratio of a property's net operating income to its market value.