Vacancy Rate
The most common investment return detractor for passive income investors is property vacancy! But, it hurts growth investors to lose precious cash flow too. What is vacancy rate and how can it be managed? Let’s find out.
What is vacancy rate?
Vacancy rate is a ratio that reflects the percentage of rental properties that are untenanted within a suburb at a particular time. Accordingly, it’s the inverse of occupancy rate which reflects the ratio of tenanted properties in that suburb.
Areas with higher vacancy rate indicate a less competitive market for tenants and an increasingly competitive market for landlords. Essentially, more landlords are competing for fewer tenants. This can push rental prices down as landlords try to secure a tenant. It can also result in additional time without income should a tenant move from your property.
Naturally, a low vacancy rate reflects a more competitive market for tenants, making it more difficult for them to freely move between properties. It can push rental prices higher and ensure the property is quickly tenanted if vacated. This is ideal for landlords.
Given tenants come and go from areas, vacancy rate will fluctuate over time. This is particularly evident in some regional Queensland areas that reached close to 0% vacancy in the Covid-19 pandemic, despite having much higher historical vacancy. Therefore, it’s important to complete historical vacancy rate research when conducting your suburb research. Use a service, like the free SQM Research, to access this valuable information.
Vacancy rate is simple to calculate and is provided by many property research suppliers. Suburbs with consistently low vacancy rates are traditionally tight rental markets that can provide greater rental returns over time.
Vacancy rate will seriously detract from investment returns if poorly managed. Suburb and property research is critical.
Can I reduce vacancy in the property?
Absolutely, in fact the headline vacancy rate is a great measure of your success as a landlord. Have you chosen a property that tenants love? If so (and you don’t make their life uncomfortable), you should minimise vacancy and perform better than other landlords in the area. You don’t want to be on the wrong side of the vacancy rate average!
Therefore, the property selection process is a vital way of reducing property vacancy. Purchasing a property that will yield a return that is close to the median rental income is a good indicator that the property will be affordable to desired tenants. Put it this way, the median price reflects the average, which means there will be the most competition between tenants in this part of the market. This is a good result for the landlord.
Can I reduce vacancy in the property?
Absolutely, in fact the headline vacancy rate is a great measure of your success as a landlord. Have you chosen a property that tenants love? If so (and you don’t make their life uncomfortable), you should minimise vacancy and perform better than other landlords in the area. You don’t want to be on the wrong side of the vacancy rate average!
Therefore, the property selection process is a vital way of reducing property vacancy. Purchasing a property that will yield a return that is close to the median rental income is a good indicator that the property will be affordable to desired tenants. Put it this way, the median price reflects the average, which means there will be the most competition between tenants in this part of the market. This is a good result for the landlord.
It also helps to understand the suburb demographics and broader market. Some areas may be fantastic for families, so a four-bedroom home may be best. But other areas may have older, blue-collar workers where having a four bedroom home might actually be a hindrance. Instead, having plenty of shed or garage space might be a better use of land. Again, this is where understanding the suburb demographics is essential, so that you purchase an attractive asset that can grow, yield and be tenanted at a better-than-market rate.
Vacancy rate will seriously detract from investment returns if poorly managed. Suburb and property research is critical.
It also helps to understand the suburb demographics and broader market. Some areas may be fantastic for families, so a four-bedroom home may be best. But other areas may have older, blue-collar workers where having a four bedroom home might actually be a hindrance. Instead, having plenty of shed or garage space might be a better use of land. Again, this is where understanding the suburb demographics is essential, so that you purchase an attractive asset that can grow, yield and be tenanted at a better-than-market rate.
The wrap-up
Property vacancy can cause serious damage to the on-cash return of a property. But the good news is that you can manage it by making smart investment decisions before and after your purchase.
However, regardless of your ability to reduce property vacancy, you should still build vacancy into your property forecasting as all properties will be vacant from time to time (using a product like our Investor Forecasts calculators makes this easy). This is because it’s critical that you have properly assessed the property, hold a cash buffer and considered upfront and ongoing affordability before making the purchase.
That’s it! Property vacancy is important. It can be the difference between earning a profit or not. For income investors, it’s a vital piece of data and one that they’ll try and control as much as possible. While it’s not as important for growth-biased investors, it still forms part of the overall financial return and could be the difference between having sufficient income to fund the costs of the property, or not. Make smart decisions before and after you purchase your property and always aim to beat the suburb vacancy rate.
About the author: Brenton has more than ten years experience in the financial planning industry. His specific qualifications include financial planning, margin lending, SMSF (self managed super funds) and direct shares. He is also an experienced investor.
Last reviewed: 11 July 2022
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