Vacancy Rate
Vacancy rate is the percentage of time a rental unit sits unoccupied. Applied to your pro forma, it reduces gross rent to reflect real-world tenant turnover, lease gaps, and market softness. An 8% annual vacancy rate means the unit is empty for roughly four weeks per year.
Vacancy is the most commonly understated input in seller pro formas — and one of the most impactful on cash flow.
Two types of vacancy
| Type | What it captures |
|---|---|
| Physical vacancy | Units that are literally unoccupied |
| Economic vacancy | Concessions, delinquencies, and rent loss from below-market leases |
Most beginner pro formas address only physical vacancy. A complete analysis includes both. For a conservative underwrite, use a combined vacancy + credit loss figure of 8–10% unless you have strong local data showing otherwise.
The formula
Simple, but the inputs matter enormously.
Worked example
A $1,800/month rental property.
| Vacancy assumption | Annual vacancy loss | Effective gross income | Impact on NOI |
|---|---|---|---|
| 0% (seller's claim) | $0 | $21,600 | Overstated |
| 5% | $1,080 | $20,520 | − $1,080 vs. seller |
| 8% (realistic) | $1,728 | $19,872 | − $1,728 vs. seller |
| 12% (census rate in weak markets) | $2,592 | $19,008 | − $2,592 vs. seller |
On this property, the difference between 5% vacancy and 12% vacancy is $1,512/year — $126/month in cash flow. That is not a rounding error.
Where to find reliable vacancy data
| Source | What it provides |
|---|---|
| U.S. Census Bureau (ACS) | Actual rental vacancy rates by county and zip code |
| HUD Fair Market Rent data | Market rent trends and tightness indicators |
| Local property management companies | Real-world turnover times for your specific property type |
| CoStar / Reis (paid) | Multifamily vacancy by submarket |
Reading vacancy in a seller's pro forma
Most sellers either omit vacancy or use 0–3%. Warning signs:
| Red flag | What it might mean |
|---|---|
| No vacancy line in pro forma | Seller is presenting gross rent as income |
| Vacancy below 5% | May be accurate for a single-family home in tight market; verify |
| "Based on current tenant" | The vacancy assumption disappears when the tenant leaves |
| Vacancy presented as "one month free rent" | This is economic vacancy, not the ongoing structural rate |
Vacancy vs. market conditions
Vacancy is not static. It responds to:
- Job growth or loss in the area
- New apartment supply
- Seasonal markets (beach towns, college towns)
- Economic recessions
In a normal market, 5–8% is a reasonable base for single-family rentals. In a soft or declining market, 10–15% is possible. In a strong, supply-constrained market, 3–5% may be realistic — but use census data to confirm, not the seller's optimism.
How vacancy connects to other metrics
| Metric | Impact of 1% higher vacancy |
|---|---|
| NOI (on $1,800/month rent) | − $216/year |
| Cap rate (on $160,000 property) | − 0.14% |
| DSCR | − 0.02 |
| Annual cash flow | − $216 |
Small vacancy differences compound. A 5% vs. 10% difference in vacancy on a 10-unit building at $1,200/month/unit is $7,200/year in lost income — that is the difference between a profitable deal and a breakeven one.
Common mistakes
1. Accepting the seller's vacancy assumption. Sellers have a financial incentive to understate vacancy. Always cross-reference with census data or local management companies.
2. Using current-tenant performance as the permanent assumption. A tenant who has lived in a property for seven years and pays on time masks the real structural vacancy risk when that tenant eventually leaves.
3. Not accounting for lease-up periods. If you are buying a vacant property, model a realistic lease-up timeline (typically 30–90 days), which translates to 8–25% vacancy in year one.
4. Ignoring economic vacancy. In markets with high concessions or delinquency, physical vacancy understates income loss. Add a credit loss line of 1–2% separately.
Frequently asked questions
What is a typical vacancy rate for single-family rentals? In a balanced market, 5–8% is standard. In tight markets (low supply, strong job growth), 3–5% is achievable. In weak markets, 10–15% or more is common. Always verify with local data.
Can a property have 0% vacancy? Only temporarily — a long-term tenant who never leaves. For underwriting purposes, always assume some vacancy. Even the best properties turn over every 3–7 years, and each turnover typically means 30–60 days of vacancy plus turnover expenses.
How does vacancy differ between single-family and multifamily? For multifamily, vacancy applies to the overall portfolio — a 10-unit building with one vacant unit is 10% vacant. The diversification reduces risk: losing one unit out of 10 is less catastrophic than losing your only unit. Single-family vacancy is binary (0% or 100%).
Should vacancy include the cost of tenant turnover? Not directly — turnover costs (cleaning, repairs, advertising) belong in the maintenance and capital reserve line. Vacancy captures only the income loss from empty days.
Vacancy rate is an analytical metric, not investment advice. Returns shown are illustrative. Always verify inputs with current market data and consult qualified professionals before making investment decisions.