Vacancy rate in rental property, explained
Vacancy rate is the share of potential gross rent lost to unoccupied periods, calculated as lost rent divided by potential gross rent. In underwriting, investors apply a vacancy allowance — commonly 5–10%, depending on the market — to turn gross potential rent into effective gross income. That allowance reduces NOI, and with it the cap rate and DSCR.
What vacancy rate measures
Vacancy rate answers one question: what share of a property’s potential income is lost to empty units or unoccupied time?
The formula:
Vacancy rate = Unoccupied rent ÷ Gross potential rent
For a single unit, vacancy shows up between tenants — the weeks a unit sits empty after move-out, before the next tenant starts paying. For a multifamily building, it is the weighted average across all units. On an annual basis:
- A unit that sits vacant for 1 month out of 12 has an 8.3% vacancy rate.
- A 10-unit building with 1 unit vacant all year has a 10% vacancy rate.
Market vacancy vs. your underwriting allowance
Market vacancy is reported by data providers (the Census Bureau’s Housing Vacancy Survey, CoStar, local apartment associations) for a geographic area and property type. It reflects actual conditions in that market at a point in time. Rising market vacancy signals softening demand or new supply being absorbed; tightening vacancy signals the opposite.
Your vacancy allowance is what you plug into your model for this specific property. It should be informed by market vacancy but also by the property type, its location within the market, and its track record. A well-located unit in a supply-constrained pocket may warrant 4–5% even if the metro runs 7%. Higher-turnover workforce housing in a market adding supply may deserve 10–12%.
The allowance you use flows straight into NOI, so being aggressive (low) on this number flatters every downstream metric.
A worked example
A single-family rental with gross potential rent of $2,400/month, purchased for $310,000:
| Vacancy assumption | Annual gross rent | Effective gross income | Operating expenses (40% of EGI) | NOI | Cap rate |
|---|---|---|---|---|---|
| 0% | $28,800 | $28,800 | −$11,520 | $17,280 | 5.6% |
| 5% | $28,800 | $27,360 | −$10,944 | $16,416 | 5.3% |
| 10% | $28,800 | $25,920 | −$10,368 | $15,552 | 5.0% |
Going from 0% to 10% vacancy drops the cap rate from 5.6% to 5.0% on the same property at the same price. Over a long hold, that difference compounds.
The arithmetic at 5% vacancy: EGI = $28,800 × 0.95 = $27,360; operating expenses at 40% = $27,360 × 0.40 = $10,944; NOI = $27,360 − $10,944 = $16,416; cap rate = $16,416 ÷ $310,000 = 5.29%, rounded to 5.3%. At 10%: EGI = $28,800 × 0.90 = $25,920; expenses = $10,368; NOI = $15,552; cap rate = 5.01%, rounded to 5.0%.
How vacancy flows into cash flow
NOI is what’s left after the vacancy allowance and operating expenses, before the mortgage. Annual debt service comes out of NOI to reach net cash flow. If NOI at 5% vacancy is $16,416 and annual debt service (principal and interest) is $14,400, annual cash flow is $2,016 — a cash-on-cash return of about 3.3% on a $62,000 down payment.
Run the same deal at 10% vacancy: NOI is $15,552, debt service is still $14,400, and annual cash flow falls to $1,152 — about 1.9% cash-on-cash. The vacancy assumption alone moves cash-on-cash by more than a full point on this deal.
That sensitivity is why the vacancy allowance deserves more scrutiny than it usually gets. It sits at the very top of the model, so an optimistic guess here quietly inflates every number below it.
Frequently asked questions
What vacancy rate should I use when underwriting a rental property?
A 5% vacancy allowance is common in tight urban markets with strong demand and fast lease-up; 8–10% is more appropriate where there is more supply, seasonal softness, or higher tenant turnover. A 0% assumption is almost never defensible unless you have a long-term net lease in place. When you can't tell, use the higher number; it costs little if you're wrong and protects you if you're right.
Is market vacancy rate the same as my vacancy allowance?
Not always. Market vacancy is a statistic for the overall rental market in a geography, reported by sources like the Census Bureau or local apartment associations. Your vacancy allowance is an assumption specific to your property. A single-family rental in a tight pocket might warrant a 5% allowance even if the broader metro runs 8%, because single-family homes typically lease faster and churn less than apartment units.
How does vacancy affect cap rate?
Vacancy reduces effective gross income, which reduces NOI. Lower NOI means a lower cap rate at the same purchase price. A property that looks like a 5.6% cap rate at 0% vacancy may be a 5.0% cap rate at a realistic 10% vacancy — the difference matters when you are comparing properties or anchoring a purchase price.
Does vacancy affect DSCR?
Yes. DSCR is NOI divided by debt service, and vacancy reduces NOI, so a higher vacancy assumption shrinks the DSCR cushion. Push vacancy from 5% to 10% and a 1.25 DSCR can sag toward 1.10; let it climb further and you trip the lender's floor. Running DSCR at an elevated vacancy is a basic stress test before you commit to financing.
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