Calculating and Understanding Your Rental's Vacancy Rate in 2024

For landlords, rental vacancy rates play a large role in determining the success of their real estate investments. These rates are an essential indicator of the supply and demand for rental properties in a particular area, providing valuable insights into setting competitive prices, identifying potential growth opportunities, and making informed investment decisions. 

This article will cover everything you need to know about rental vacancy rates, from understanding what they are and how they're calculated to exploring historical trends, projecting potential capital growth, and determining a "normal" or "good" vacancy rate.

We will also address any common misconceptions and provide current projections for 2024, giving you the tools to make informed investment decisions and stay ahead in the competitive real estate market.

What are rental vacancy rates?

Rental vacancy rates refer to the percentage of rental properties unoccupied in a particular geographic area at a specific time. 

These rates indicate supply and demand in the property leasing and real estate investor market. Real estate investors and property owners rely on them to make informed decisions regarding pricing, investment opportunities, and potential growth.

Low vacancy rates typically indicate high demand for rental properties in a particular area, leading to higher rental prices and more competition for available units. On the other hand, high rental vacancy rates can also suggest an oversupply of rental units, resulting in lower rental prices and less competition for available homes.

It's important to note that what constitutes a low or high vacancy rate can vary depending on the location, as well as other factors. In some areas, a vacancy rate of 5% may be considered high, while in others, a vacancy rate of 10% may be regarded as normal. 

Ultimately, the optimal vacancy and occupancy rate for a particular area depends on the specific economic and demographic factors affecting your area.

Factors that impact rental vacancy rates

Several factors can significantly impact rental vacancy rates, influencing the balance between supply and demand in the rental market. Understanding these factors can help landlords, investors, and property managers make more informed decisions regarding their properties. Here are the most influential factors to consider:

• Economic conditions: The overall health of the economy is a primary driver. In times of economic prosperity, more people can afford to rent, leading to lower vacancy rates. Conversely, higher unemployment rates may increase vacancy rates during economic downturns, as fewer people can afford to rent.
• Population growth: Areas experiencing high population growth often see decreased vacancy rates due to an increased demand for housing. Migration patterns, both into and out of an area, can significantly affect demand for rental properties.
• Housing affordability: In regions where purchasing a home is extremely expensive, more individuals might opt to rent, reducing the vacancy rates. The inverse is true in areas where homeownership is more affordable.
• New construction: Adding new rental properties to the market can increase supply, potentially raising the vacancy rate if the supply growth outpaces demand. The timing and volume of new constructions can significantly influence market dynamics.
• Rental prices: Rental price levels and their adjustments directly affect vacancy rates. High rental prices may deter potential tenants, increasing vacancy rates, while more competitively priced units will likely be rented out more quickly.
• Local job market: Employment opportunities can attract people to or deter them from a region, impacting demand for rental properties. Strong job growth in an area typically correlates with lower vacancy rates.
• Seasonality: Rental markets often experience seasonal fluctuations. For example, college towns may see higher vacancy rates during summer when students return home.
• Regulatory environment: Local regulations, such as rent control policies or zoning laws, can impact rental vacancy rates. These regulations might influence landlords' decisions on property investments and how they manage their rental units.

Why is the vacancy rate of a rental property important?

Evaluating rental vacancy rates offers landlords and real estate investors insights into property management and investment decisions. Monitoring these physical vacancy rates is a good idea for several reasons:

• Competitive pricing: Vacancy rates allow landlords and investors to set competitive rental prices. A high vacancy rate suggests market saturation, necessitating lower rents to attract tenants. A low vacancy rate implies that raising rents is possible without impacting demand.
• Informed investment decisions: Analyzing vacancy rates enables real estate investors to gauge rental property demand in a particular area. Low vacancy rates signal high demand, making the area a potentially lucrative investment opportunity. Conversely, high vacancy rates may imply an oversupply of rental units and reduced financial viability for new investments. Vacancy rates also allow investors to compare various investment prospects and identify the highest return on investment.
• Growth opportunities: Examining vacancy rates helps investors pinpoint areas with high demand and limited supply. For instance, low vacancy rates in a specific area might prompt investors to develop new properties to capitalize on the strong demand.

Knowledge of rental vacancy rates equips real estate investors with valuable insights for decision-making in the rental property market. 

Trends in U.S. rental vacancy rates

Over the past decade, the U.S. has experienced a general decline in rental vacancy rates, with recent fluctuations influenced by various factors such as the COVID-19 pandemic. The U.S. Rental Vacancy Rate for Q4 2022 was 5.80%, a slight increase compared to the previous year’s Q4 at a market vacancy rate of 5.60% but a notable decrease from Q4 2020's 6.5%.

To understand the current housing market dynamics in the U.S., historical rental vacancy rate trends must be taken into account. Several factors have contributed to these trends.

The first is the economic recovery following the 2008 financial crisis. As the economy improved, more people entered the job market, leading to an increased demand for housing, especially rental properties, and a decrease in rental vacancies, as more people were able to afford rental properties.

Another contributing factor is the increasing popularity of renting as opposed to homeownership. Due to the high cost of homeownership, stricter mortgage lending standards, and a growing preference for a more flexible lifestyle, many people opt to rent rather than buy, which has led to a surge in demand for rental properties, driving down vacancy rates.

The COVID-19 pandemic has also played a significant role in shaping the trends in rental vacancy rates. During the early stages of 2020, many people faced job losses, furloughs, and income reductions, resulting in some renters moving in with family members or roommates and temporarily increasing vacancy rates in certain areas. However, the rental market quickly adapted, with landlords offering incentives like reduced rent or rent-free months to attract and retain tenants.

As the pandemic progressed and remote work became more prevalent, many people moved from expensive urban centers to more affordable suburban and rural areas, seeking larger living spaces and a lower cost of living. This shift in population led to a surge in rental demand in these areas and contributed to the decline in vacancy rates.

Federal and state governments implemented various relief measures to tackle the economic impact caused by the pandemic. These included eviction moratoriums and rental assistance programs, which helped struggling renters stay in their homes and maintain the demand for rental properties.

Demographic factors also play a role in shaping rental vacancy rate trends. The millennial generation, for instance, has shown a preference for renting over homeownership, often due to financial constraints and a desire for mobility. As millennials and Gen Z continue to enter the rental market, the demand for rental homes will remain strong, further contributing to lower vacancy rates.

How to calculate rental vacancy rates

First, divide the total number of unoccupied rental units in a specific area by the total number of available rental units. This will yield the average vacancy rate for the rental market as a percentage.

For example, let's say there are 500 rental units in a given location, and 50 of them are vacant. The rental vacancy rate, in this case, would be 10% (50 divided by 500).

To simplify this calculation process, use Azibo's vacancy rate calculator.

What is a normal rental vacancy rate?

A normal rental vacancy rate can vary significantly depending on various factors, including the location, property type, and current market conditions. Generally, a market average vacancy rate of between 2% and 7% is considered healthy in a balanced rental market.

This range indicates that there is a good equilibrium between supply and demand: landlords can find tenants for their properties without significant downtime, and renters have enough options to find suitable accommodations without the market being oversaturated.

What is a "good" rental vacancy rate?

A good vacancy rate is a level at which there is a balance between supply and demand in the rental market, meaning that there are enough properties available to meet the needs of renters in a particular area but not so many that there are a significant number of unoccupied homes.

Generally, a 5% to 10% rental vacancy rate is considered healthy. This means there are enough available properties to meet demand but not so many that there is an oversupply of units. 

A vacancy rate below 5% suggests that the demand for properties exceeds the available supply, which can drive up rental prices and make it difficult for potential tenants to find suitable housing. 

On the other hand, a vacancy rate above 10% can indicate too many rental properties are available relative to demand, leading to lower rental prices and reduced profits for landlords and real estate investors.

It is important to note that the definition of a "good" rental vacancy rate can vary depending on the property's location. A lower vacancy rate may be considered healthy in urban areas with a high demand for rental properties. In contrast, a higher vacancy rate may be more acceptable in rural areas with a smaller population and lower demand for properties.

Additionally, the type of property can also affect the rate. For example, areas with high-rise apartment buildings may have a different acceptable rate than areas with single-family homes.

Overall, a "good" rental vacancy rate is one that allows real estate investors to maintain profitable rental properties while meeting renters' needs in a particular area. 

Is a high vacancy rate bad?

A high vacancy rate can indicate poor property management, ineffective marketing strategies, or an undesirable location. That said, there are several situations where a high vacancy rate may be beneficial — or at least not a negative indicator — for investors:

• Renovation and repairs: A high vacancy rate allows landlords to renovate and repair properties without the hassle of moving tenants around. Renovations and repairs can improve the quality of the property and increase its value, which can translate to higher rental income in the future.
• Market fluctuations: High vacancy rates can also be a result of market fluctuations, which are beyond the control of landlords and investors. A sudden oversupply of rental properties can lead to an increase in rates. However, this can signal that the market is correcting itself, and the oversupply will eventually balance out. In such cases, landlords and investors can wait out the market fluctuations and make the most of the situation.
• Rebranding and repositioning: A high vacancy rate can also allow landlords and investors to rebrand and reposition their rental properties. They can take advantage of the downtime to make changes to the property, such as redesigning or adding amenities, which can help attract new tenants. This can increase the overall value of the property and boost rental income.

Landlords must evaluate the reasons behind the high vacancy rate and take appropriate action to address the issue. However, in certain situations, a high rate can allow landlords and investors to make necessary changes to the property and increase its overall value.

The bottom line? Rental vacancy rates should not solely predict ROI or capital growth. Other factors, such as population growth, economic trends, and changes in housing policies, can also influence property values. For example, a decrease in population growth or a decline in the local job market may negatively impact rental demand and property values, even if vacancy rates remain low. 

Additionally, rental vacancy rates may not accurately reflect the demand for specific properties or neighborhoods — they only measure the number of vacant units as a percentage of the total rental market.

7 ways to reduce your rental property vacancy rates

Reducing your own lost rental income and property vacancy rates is crucial for ensuring the profitability of your investment property. A lower vacancy rate means more consistent net operating income and less lost revenue. Here are strategies that can help you achieve this:

1. Price competitively

Ensure your rental rates are competitive within the local market. Research comparable properties to set a fair price that attracts tenants without undercutting your potential income.

2. Quality tenants

Focus on finding and retaining quality tenants. Utilize comprehensive tenant screening processes to identify tenants who are likely to stay long-term, reducing turnover and vacancies.

3. Effective marketing

Boost your property's visibility by listing it on popular rental listing platforms. Highlight unique features to make your rental units stand out in the real estate market.

4. Property improvements

Upgrading your property can make it more appealing to prospective renters. Consider renovations such as modern appliances or enhanced outdoor spaces that increase property value and rental appeal.

5. Flexible lease terms

Offering flexible lease terms can attract a wider pool of tenants. For example, being open to pets or offering shorter lease durations might fill vacant units faster.

6. Professional property management

Hiring a property manager can improve the efficiency of operations, from marketing to rent collection. This can help maintain a low physical vacancy rate by ensuring the property is well-maintained and that tenant issues are promptly addressed.

7. Use technology

Platforms like Azibo can streamline the management of your rental property, from collecting rent online to managing lease agreements. This efficiency can enhance tenant satisfaction and reduce vacancies.

By implementing these strategies, property owners can significantly reduce vacancy rates, enhancing the profitability and value of their rental real estate investments.

Rental vacancy rate projections for 2024

Reflecting on the prevailing market dynamics and economic indicators, the expectations for rental vacancy rates in 2024 diverge from the previous year's patterns. Anticipated shifts in the real estate landscape suggest a nuanced trajectory for the rental market.

The momentum of economic recovery, alongside a sustained inclination towards renting rather than homeownership, is poised to bolster the demand for rental accommodations. This trend is largely fueled by millennials' evolving preferences and life stages, who comprise an increasingly significant part of the rental market.

Adopting remote work, a paradigm shift catalyzed by the COVID-19 pandemic, will likely continue to influence housing preferences. This ongoing transition is expected to spur demand for rental options in less urbanized areas, offering more affordable living spaces than city centers. Such a movement could potentially moderate vacancy rates in suburban and rural locales, reflecting a broader dispersion of rental demand.

Despite these positive indicators, the rental market remains susceptible to various external pressures. Economic fluctuations, policy changes, and unforeseen global events could markedly affect these projections.

It's imperative for real estate investors and other property owners and managers to stay abreast of these variables. Vigilant monitoring of market conditions and adaptability to emerging trends will be key to navigating the complexities of the 2024 rental landscape.

Understanding rental vacancy rates in 2024 and beyond 

By providing insights into market demand, setting competitive rental rates, and identifying growth opportunities, rental vacancy rates enable landlords and investors to make informed decisions and maximize their profits.

As we move further into 2024, staying updated on current trends and economic factors that may impact the rental market is key.

With the help of our vacancy rate calculator here, you can calculate rental vacancy rates and gain a competitive edge in the ever-evolving real estate market. Stay informed, make strategic decisions, and capitalize on opportunities to ensure success in your real estate investments.