The vacancy rate is a measure of how many rental properties in a location or market are currently without a tenant. Two important figures are needed to determine the vacancy rate:
- The number of rental properties in the location
- The number of these properties that are vacant
It is recorded as a percentage.
If there are 100 rental properties in a suburb or location and 10 of them are vacant, the vacancy rate would be:
10 x 100 = 10%
A low vacancy rate means more confidence in a market and more security for the investor, as the cash flow avoids lengthy periods without a tenant. The Australian National Average Vacancy rate is 2.5%
A low vacancy rate means better yield. It is inevitable that the tenant will move out at some point. The less time you are without a tenant, the more money you are making if they are replaced quickly. The time it takes to find the new tenant is indicated by the vacancy rate.
A wise investor should know the vacancy rate before entering a particular market. It should be represented in the projected cash flow to ensure they can afford to be without the rental income for (x) weeks.
Vacancy rates are not just a measure of cash flow and income from your tenant. It can also be a growth indicator. A location with a low vacancy rate means there is demand in the area and a potential undersupply of housing. This means that a property should not stay vacant for long as there is always demand from someone new to rent the property.
If there is demand from the rental market, it is safe to assume it is a desirable area to live. Desirable areas attract home buyers and renters alike. One of the key fundamentals when looking for an investment property is whether the property has owner occupier appeal.
If a location becomes attractive to live in, tenants will move there before home owners. This is due to their mobility and ease of getting into the market. They will put downward pressure on the vacancy rate making the location appealing to an investor to buy there. If home buying and demand in an area increases, what typically follows is capital growth.
A great example of this is the gentrifying suburbs of Yarraville and Seddon in Melbourne. What was once an area overlooked by people has had a trendy younger population begin renting, followed by a lot of investors and home buyers. This has transformed the area into a very sought-after pocket of Melbourne close to the CBD where vacancy rates are low and prices have skyrocketed over the last ten years.