Measuring Vacancy Rate and Risk for your Real Estate Investment
Investing in real estate can be an exciting venture, but it's important to consider the potential risks involved. One significant factor that real estate investors must consider is the vacancy rate.
You may ask “What is Vacancy Rate”? Well, let's break it down into simple terms. Vacancy rate tells us how often a property sits empty and doesn't generate rental income. Measuring and knowing this rate is vital because it directly impacts your bottom line and overall return on investment (real estate investment ROI). We don't want those rental properties gathering dust, do we?
Calculating Vacancy Rate For Your Potential Rental Property
When underwriting real estate purchases, an investor often assumes a certain vacancy rate based on real estate market conditions and rental property type. For example, if the investor assumes a 1-week vacancy per year, it means they expect the property to be vacant for approximately 1/52 of the year. Keep in mind that this assumption can vary depending on the local real estate market and rental property class (short-term rental vs. long-term rental). The above bakes in the assumption that some residents will stay for more than 1 year, which naturally helps lower rental property vacancy rates.
To help limit vacancies, at Unbundled Property Management we make sure to have a scheduled point of communication with every resident 60 days before their lease expires. At this time, we discuss with residents their lease renewal options, and if they will not be renewing, we begin to coordinate getting the rental property on the rental market. We always suggest to our Connecticut property management clients that they include specific language in their leases to allow for showings of the property the last 30 days of the lease. Showing a rental property when a resident has not yet moved out can be challenging at times as you simultaneously have one resident packing up to move out and new potential residents viewing the property.
At Unbundled Property Management we’ve built specific systems and strategies to help counter these challenges. An example of what we have done in the past when facing a challenging move out is agreeing with the existing resident on specific times that work for them to show the property. If times are limited we work with the resident and real estate agent to schedule multiple showings at one time and sometimes will even offer an open house during a two hour time block that allows as many potential residents to view the property as possible. YES, you can host an open house for rental properties! While it’s not always feasible it is a great way to help limit vacancy rates for your Connecticut rental property.
Real Estate Market and Rental Property Type Variations
Vacancy rates can vary from market to market and from property class to property class. Different types of rentals, such as Airbnb properties (short-term rentals) vs. annual-lease ones (long-term rentals), require distinct approaches to measuring vacancies. For example, measuring Airbnb's vacancy rate requires active monitoring and a bit more effort compared to a regular annual lease. It involves keeping a close eye on bookings, seasonal trends, and short-term rental market demand. In contrast, calculating the vacancy rate for a typical annual-lease property might be more straightforward, as you can rely on the duration of the lease agreement. No matter what asset class your investment property belongs to, you will always want to have a beat on the current rental market conditions. At Unbundled Property Management, we update our Connecticut town and city pages quarterly with the most recent and accurate data from the CT MLS (Connecticut Multiple Listings Service).
The Cost of Rental Market Vacancies
Vacancies can be one of the most expensive costs real estate investors incur. When your investment property sits empty, you still have to cover expenses like mortgage payments, property taxes, insurance, and utilities. Additionally, expenses may arise from realtor fees and necessary repairs or maintenance before a new resident moves into your rental property.
Researching Local Vacancy Rates For A New Real Etsate Investment
Now, how do you measure vacancy rates in new real estate markets? Start your vacancy rate research requesting your agent to send you all rental data within the town/city you’re investing in from the past 6-12 months as a start. Don’t only look at what has rented but also look at expired rental listing data, price reductions and days on the local real estate market for the properties that have been rented.
Factors to Consider When Deciding Where To Buy An Investment Property
Investing in rental properties/real estate in areas with strong job markets can help mitigate the risk of vacancies. A thriving job market often leads to increased demand for rental properties, reducing the likelihood of extended vacancies. Furthermore, monitoring population trends, particularly in growing areas, can give you an idea of the potential rental demand.
Monitoring The Population Of An Area Where You Are Considering Buying A Rental Property
Let’s look at a specific real estate market example. Due to its proximity to a major job hotspot, which keeps its population high, West Hartford CT has a huge market for potential residents, and ultimately renters, thus it has lower risk of vacancy.
We all see articles and hear about real estate values soaring in Florida over the past few years. Population and jobs have increased substantially in Florida causing both property values and rent prices to skyrocket. Check out this article: https://finance.yahoo.com/news/no-longer-gods-waiting-room-140000239.html
As noted in the article above, Florida, is no longer a place people go just to vacation and retire. Florida now has a booming job market, which is proof that the real estate rental market will follow job opportunities.
We, at Unbundled Property Management, want to help you out in determining which Connecticut towns and cities have strong job markets, so we recently added this new Town & City data section to our site. We plan to continue to add new cities and towns to the list, so continue to check back, so check them out now at the top of this page and clicking the Town and City Data.
Bonus Tip To Keep Your Rental Property Vacancies Low!
Another tip we give our CT property management clients is to have photos taken BEFORE any residents move in to your rental property so you have great clean photos of your investment property that can be used when relisting the property. If you do this, it’s important to disclose the date of the photos being used, and any material changes that have occurred since, but this helps potential residents have a true feel for the space and will likely help you rent your property faster. During these initial photos you may also want to consider light staging of the property for photos. While there’s no way to be certain we do believe a staged property has a better chance at receiving top dollar and also less time on the market.
Summary Of How To Reduce Vacancy Risk Of Your Rental Property
Real estate investing always carries a certain level of risk, and assessing the vacancy rate is crucial for making informed real estate investment decisions. By understanding what vacancy rate represents and how to calculate it, investors can gauge potential cash flow and risk associated with a rental property. It’s your job to measure and conclude your risk tolerance before purchasing a real estate rental property. However you decide to calculate your vacancy rate, be consistent and never assume a rental property will always be occupied.
Our Rental Property Management Team Is Always Here To Help and Advise You!
As experienced property managers, the team here at our Connecticut rental property management company, knows that there are, and has successfully implemented various means, to minimize the risk of vacancies. As we explained in our blog post about the value of having a real estate mentor, our property management experts are always here to advise and support you. So, give us a call here at Unbundled Property Management. We always deliver 5-star property management service for real estate investors with our reliable and responsive team. Happy Investing!
