For property owners looking to optimize their rental and maximize their income, it’s essential to pay attention to every metric that gives them insight into how to manage their business better. To that end, this article focuses on how using vacancy rates as a guide for property management can help you make data-driven decisions. If your rates are too high, it could signal poor management or overpricing. On the other hand, low vacancy rates indicate strong demand and a potential for increased earnings. Continue reading below as we discuss further on how vacancy rates can be utilized for a better property management strategy.
What is the Vacancy Rate?
Before getting into how to use the vacancy rate, we have to establish what this metric means. If you’re new to real estate, you may have seen vacancy rates expressed in percentages with no real inclination on what it entails, but let’s break it down.
Picture an apartment building with 30 units that has 6 empty flats. In such a scenario, we would calculate the vacancy rate as:
Vacancy Rate = Empty Units × 100%
Total Number of Units = 6 × 100%
30 = 20%
That means the vacancy rate for that apartment building over the specified period is 20%, and it lets you know the efficiency of filling up units. However, that number isn’t solely dependent on the location or neighborhood amenities. It can also speak to the property’s aesthetics and management. Thus, your rental manager in Philadelphia can track your vacancy rates and discuss strategies on how to improve them gradually.
Dangers of 0% Vacancy Rate
Lack of Flexibility
Imagine you’re looking to buy a new property, and after calculating the vacancy rate, you realize that it is 0%. Sounds ideal, right? On the contrary, an area with zero vacancy rates indicates all units are full all year round, and that could come with unique issues. For starters, having tenants on the premises at all times could be a major hindrance to making necessary upgrades without disrupting someone’s lease. If your roof needs replacement, you’d have to significantly inconvenience your renters or pay for temporary accommodation to get them out of the house while work is being done. That would be an extra expense on top of the cost of the renovation, as opposed to if you had the flexibility to wait till the property was empty.
Potential for Under-Market Rents
Analyzing market rates is vital when calculating vacancy rates to set competitive rental pricing. If there’s always another tenant waiting to take up space immediately after your unit is empty, it could be a sign that you’re lowballing yourself and your rental prices are too low. In other words, strong demand with no downtime often means that you’re leaving money on the table, and there’s a possible gap between market rates and your prices.
Poor Tenant Quality
If you prioritize filling your units quickly over the quality of tenants you get, you could be increasing the risk margin of your property. Savvy landlords often budget for downtimes in their rental property, which affords them time to make repairs and cosmetic changes between renters, but also undergo a thorough screening process. As a result, shortening the timeframe between when an existing renter leaves and a new one enters could open your property to deal with problematic tenants.
Why Vacancy Rate Matters for Landlords?
Measures Property Performance
Get a better picture of your property’s performance by weighing its vacancy rate carefully. Vacancy rates can offer a needed window into the health of your rental business. If it’s too high, it could suggest that your prices are above optimal in the current market, your management is inefficient, or your location’s demand is too low. On the other side, a low, but not zero, vacancy rate shows that you’re able to strike a balance between tenant satisfaction and market pricing.
Optimizes Investment Decisions
Another reason tenants need to track vacancy rates is that it improves their investment decisions. For example, if you’re looking to buy a new property with a high vacancy rate, you could negotiate a better purchase price since your rental income would be lower than max capacity. On the other hand, if the high vacancy rates aren’t due to market demand but the rundown state of the rental, you can make a detailed improvement plan with updates that’ll attract newer tenants.
Conclusion
Using vacancy rates is a valuable strategy for good property management. After all, it’s a metric that can provide insight into your property’s performance, like how your pricing aligns with market trends, the efficiency of your management, and overall market conditions. Zero vacancies aren’t ideal, they’re an indicator that you may be underpricing your rental or skipping a thorough tenant screening process. Besides, it may also make property upgrades difficult due to ongoing leases that limit your flexibility. In the long run, understanding vacancy rates can help you measure your property’s performance better and make smarter investment decisions.
