Vacancy rate
What is the vacancy rate?
The vacancy rate is a measure of how many rental properties in a location are currently without a tenant. Two figures are needed to determine a basic vacancy rate:
- The number of rental properties
- The number of these that are vacant
If there are 200 rental properties in a suburb and 4 of them are vacant, then the vacancy rate is 2% (200 ÷ 4 = 0.02 x 100 = 2%).
Why is the vacancy rate important?
A low vacancy rate means good security of cash flow for investors. If you can't survive for months without any rental income, then you really should carefully examine vacancy rates.
A low vacancy rate means better net yield for the investor over time. Sooner or later a tenant is going to move out of your investment property. The less time the property is vacant, the more money you're making. How long it takes to refill the property with a new tenant is indicated by the vacancy rate.
Knowing the vacancy rate can also help investors with their cash flow estimate and ultimately, their return on investment projection. Too many investors assume the income they'll receive from a property is just a little less than the gross yield.
But there is more to vacancy rates than just improved cash flow. Vacancy rates also reflect capital growth. This is not only because investors like a location with low vacancy rates. It's also because it indicates under-supply with respect to demand.
If there is strong demand from tenants to rent in a location, then properties will not stay vacant for very long. Similarly, if there are few properties available for rent, they'll be snapped up quickly by renters. So a low vacancy rate means strong tenant demand to rental property supply.
If a tenant finds a location attractive to live in, a home owner is likely to find the location attractive as well. Tenants are humans too after all. So a low vacancy rate can also mean impending capital growth.
Getting a lease is a lot easier than getting a mortgage. And a bond is a lot less than a deposit. So tenants are more agile than home owners and investors. If a location becomes attractive to live in, tenants will move there before home owners. They'll drive down vacancy rates making the location also attractive for investors. So a low vacancy rate may actually be a lead indicator for future capital growth.
How can investors use vacancy rates?
You should use the vacancy rate to estimate cash flow to calculate projected return on investment. Very few cash-flow projections consider vacancy. You can see plenty of them published from developers or in magazine articles, advertising, blogs and so on. If the vacancy rate is 2%, then reduce the cash flow per year by 2%. Also, factor in a re-letting fee.
You can also use the vacancy rate to steer away from locations with high vacancy rates. And you should target locations with low vacancy rates since it is a reflection of good demand to supply.
Checking the vacancy should be one of the first things you research as part of your due diligence. You can use the Suburb Analyser to check a property market's vacancy rate.
You can also search for markets that have a low vacancy rate using the Market Matcher.
The vacancy rate is used in the basic DSR along with other stats. Checking the DSR is an easy way to view a bunch of stats at a glance.
The DSR in turn is considered in DSR+ which is even more reliable since it includes even more stats.
Is the vacancy rate reliable?
There are a number of problems in calculating an accurate vacancy rate for an isolated market.
Some data providers choose to publish a vacancy rate at the post code level instead of at the suburb level or even further, down to the property type level (i.e. Houses/Units). Other data providers even go down to the bedroom level! They publish a vacancy rate for one bedroom units as well as 2 and 3 bedroom units.
The more you zoom in to a smaller market (like bedroom count), the less data you have to base calculations on. The smaller the sample size or volume of trades in these tiny markets, the poorer the accuracy is likely to be. In fact, going down to the bedroom level is never a choice made by any of the major data providers. Some of the figures can be truly misleading.
The post code level is unlikely to provide misleading figures because there would be very few post codes in Australia with such thinly traded rental markets. However, what you gain with post code vacancies, you lose with geographical accuracy. You don't know which suburb to invest in for the post code. There are some post codes in Australia with over 100 suburbs. And is the low vacancy rate attributed to houses specifically or units?
An important part of estimating vacancy rate is acquiring the number of rental properties within a suburb. There are figures available from the Australian Bureau of Statistics for the number of dwellings and figures available for the proportion of renters. But the breakdown is not by dwelling type (House/Unit). So if renters are largely confined to one dwelling type, for example houses, the unit vacancy figure may be inaccurate.
Another potential problem occurs if the number of vacant properties counts those currently listed for rent but with a note, "Available in 2 weeks" for example. It is possible for a property manager to list a property for rent mentioning that it is available in the future, but it is currently occupied. This can make vacancy calculations inaccurate if it isn't considered.
You can get a rough idea of vacancy rate by simply querying property portal sites like Domain and Real Estate. One good thing about the vacancy rate is that it is easy to get a very recent figure. You can see properties for rent right now. Property managers may update their listings any day so the timeliness of the data is excellent.
What is a good vacancy rate?
The following context ruler shows the vacancy rate for Subiaco units for January 2015 was 3.89%. The chart also shows a range of possible, likely and typical vacancy rates.
As you can see from the Context Ruler, a vacancy of around 2% was pretty normal in January 2015 around Australia.
You can find the best markets by vacancy rate using the Market Matcher.
Base data and other sources
Some alternative sources for this kind of data include: