This calculator gives estimates for education and planning. It is not investment, tax or legal advice; for decisions about your own situation, talk to a qualified financial professional.
Two ways to measure vacancy
For a rental property, vacancy is lost income. It can be measured in two ways:
- Physical vacancy: the share of unit-months during which units stood empty.
- Economic vacancy: the share of potential rent that was not collected, including empty units, bad debt and concessions such as free months.
Economic vacancy is usually higher and is the one that matters for cash flow.
The formulas
Gross potential income (GPI) = units × monthly rent × 12
Physical vacancy = vacant unit-months ÷ (units × 12)
Economic vacancy = (rent lost to vacancy + bad debt and concessions) ÷ GPI
Effective gross income (EGI) = GPI − vacancy loss − bad debt
Example
A 10-unit building at $1,500 a month per unit, with 6 vacant unit-months in the year and $2,000 of bad debt and concessions:
- GPI: $180,000;
- physical vacancy: 6 ÷ 120 = 5%;
- economic vacancy: ($9,000 + $2,000) ÷ $180,000 ≈ 6.1%;
- EGI: $169,000.
Break-even occupancy
Break-even occupancy = (operating expenses + debt service) ÷ GPI
With $60,000 of operating expenses and $70,000 of loan payments, the building must be at least 72.2% occupied to cover its costs. Lenders like to see a break-even below about 80% to 85%: the lower it is, the more vacancy the property can absorb.
What is a normal vacancy rate?
US rental vacancy has typically run between about 5% and 8% in recent decades, with large differences by city, neighborhood and property type. Underwriting often assumes 5% to 10% vacancy and credit loss, even for a property that is full today, because turnover is inevitable.
Reducing vacancy
- Price at market: a unit empty for one month costs 8% of a year’s rent, more than most rent reductions.
- Turn units quickly: plan cleaning and repairs before the tenant leaves.
- Keep good tenants: prompt maintenance and fair renewals reduce turnover, the main cause of vacancy.
- Screen tenants consistently and lawfully to limit bad debt.
- Market early: list a unit as soon as notice is given.
Use the rental yield and DSCR calculators with these figures to judge the property’s return and its ability to carry a loan.