Vacancy/Occupancy Rate Calculation

 

For any rental property, vacancy rate plus occupancy rate equals 100 percent.  Sellers like to use occupancy rate because it sounds more positive, but as you calculate NOI, Cap Rate and post-purchase strategy, you'll need both of these numbers.  Here is how to calculate a solid vacancy rate and convert it to occupancy rate.

 

STEP CALCULATING VACANCY & OCCUPANCY RATES
1 Obtain rent roll information for a year or more from your prospective property.  Count vacancies and units available.  It is better to do the counting yourself rather than letting the seller or the seller's agent do the counting.  There are many assumptions possible, and if you know what they are, you can decide what to do about them, rather than letting someone else decide for you.  For example, what if one building of a community was made vacant for renovations?  You would probably not include those units in your calculations for the time the renovations were underway.  What if the seller's aunt lived in an apartment and didn't like to hear neighbors, so all adjoining apartments were kept vacant?  You would probably count those units.  What if one unit is used as an office for the community?  You would probably not count that unit.  And, so on.

 

2 It is best to reduce your numbers to the most elemental levels.  If rents are paid monthly, count vacant units by the month.  If bi-weekly, count bi-weekly.  Let's assume rents are collected monthly for your prospective property.  For each month in your 12 month collection of rent rolls, count the number of units that were potentially available, and the number of units that were vacant (vacant & ready, in turnaround, off line).  You can set up your data sheet this way:

EXAMPLE:

MONTH

UNITS  AVAILABLE UNITS VACANT NOTES
1 16 5  
2 16 4  
3 16 3  
4 16 4 Water heater leak in unit 6; water damage in 2
5 16 1  
6 16 0  
7 16 0  
8 16 2  
9 16 0  
10 16 1  
11 16 2  
12 16 3  

TOTALS

192 25

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3 Lets assume you are looking at a 16-plex apartment building.  There are 16 units available for rent  You have calculated that, over the course of a year, there are 16 X 12 = 192 unit-months available.  That is, there are 16 units available each month, and over a 12 month period, there are 192 unit-months available.
4 Now add up the vacant units, by month, over the 12-month period.  Let's assume you calculated there were 25 vacant unit-months.  That is, the number of units that were available for rent each month, but were not rented, over a 12 month period, was 25.
5 Calculate vacancy rate:

EXAMPLE:  25 / 192  =  0.13  OR  13%

6 Calculate occupancy rate: 

EXAMPLE:  100%  -  13%  =  87%

7 Armed with a realistic vacancy rate, you can calculate NOI, Cap Rate, estimate the growth potential for your prospective property, gain an insight into maintenance and turnaround costs and decide if you need to investigate why the vacancy rate is where it is.