24
May
2017

Your Rental Investment Glossary: Vacancy and Occupancy Rates

At Spartan, we have found that the best business relationships are formed with clients that are well-informed. We recently started a [blog series] aimed at helping all our clients – those we already work with and those we may not have met yet – understand some of the core concepts in turnkey rental investing. Our hope is that by breaking down these concepts and illustrating the math in clear, simple examples, our investors will be armed with the knowledge necessary to make smart, sensible, and lucrative investments – whether with us or in other markets around the country.

When you, as the investor, know exactly what all those ‘ROI’ numbers mean and how to calculate them, you can become immune to that much-feared ‘analysis paralysis’. If you know what you’re looking at and how all the figures fit together, you’re much less likely to feel anxious about your investment and more likely to enjoy the process. The result is a better experience all around.

Vacancy and Occupancy Rates

One of the most important metrics in turnkey is the occupancy/vacancy rate. These terms get thrown around a lot, but often they go unexplained under the assumption that everyone knows what they mean, how they are calculated and how they can impact returns. However, the truth is that, while these numbers are extremely important, few turnkey providers actually track their occupancy and vacancy rates – meaning the returns they ‘calculate’ can be wildly off base, even misleading. Once you understand exactly what this metric entails, however, you’ll never waste time on another ‘estimate’ again.

As the names imply, the occupancy and vacancy rates are inverses of each other. Essentially, the occupancy rate is the percentage of rental hours per year that a given property or portfolio of properties remains occupied. The vacancy rate is its inverse. So if a property has an occupancy rate of 96%, then it also has a vacancy rate of 4%.

Rate Calculation and Rental Units

So what do these percentages actually mean? To understand this concept, it is first necessary to understand the concept of rental units. For every property there are a certain number of months or days during which it can be either occupied or vacant. When it is occupied, the property generates rental income. When it is vacant, it does not – meaning you, as the investor, may be losing money to carrying costs. Obviously, you want your property to be occupied as much as possible.

The smaller the rental unit used in occupancy calculations, the more exact the figure, but most people use months or days, depending on the size of the portfolio. For a single property, rental days are typically used. For investors that really want to maximize the passive income potential of turnkey by building larger portfolios, rental months is the typical unit of measurement due to ease of record-keeping.

Though occupancy and vacancy rates can be calculated for any time period, we’ll start with a single year for simplicity. This means that we need to know the total number of rental months or days that make up a year, which, as we all know, is 12 months or 365 days. So, If your property is occupied for all 365 rental days, then you have a 100% occupancy rate, or a 0% vacancy rate for the past year.

Annual Rate Calculation Example

Now that we have the number of rental days in our period, determining the occupancy rate of a given property is a simple matter of record keeping and arithmetic.

Assume you have a single property you have owned for a full year. At some point, you had a tenancy issue that resulted in a move-out and re-lease. The time between move-out and the new tenant’s move-in was 35 days. During that time, of course, your property was vacant, reducing the number of occupied rental days for the year. Since it was vacant for 35 days, your occupancy rate is calculated thusly:

(365 – 35) / 365 * 100 = 90.41%

Your vacancy rate for the same period, therefore, is 100% – 90.41%, or 9.59%.

If you wish to calculate a longer or shorter period, simply determine the number of rental days in the period and the rest of the math remains the same. For a 13-week period, there are 91 rental days, for example. For a five-year period, there are 1,825 days.

Portfolio Rates

So far we’ve discussed occupancy and vacancy rates for single properties. Most smart investors, however, want to build larger portfolios comprised of several investment properties in order to spread out their total risk. In addition, a good turnkey outfit should be providing numbers for all the properties they manage to give an indication of their overall ability to ensure that each property provides regular rental income to their investors.

Luckily, calculating the cumulative occupancy rate of a portfolio of properties is simple. Because of the increased number of holdings, most investors and providers switch to rental months as the unit of measurement for ease of calculation.

Assume you have a portfolio of 10 rentals, all of which you have held for the past year, for a total of 10 * 12, or 120 rental months.

Now assume, that you have had move-outs on four of your properties this year. One property required a large amount of work due to a messy move-out, and was therefore vacant for two months before you were able to move in a new tenant. The other three, however, were standard move-outs due to lease expiration, and all three re-leased in an average amount of time, remaining vacant for only 25, 30, and 35 days, respectively.

To determine the average occupancy rate for the year, first add up all the vacancies and divide by the number of days in a month (30 for standardization) to calculate the total number of rental months lost to vacancy.

(60 + 25 + 30 + 35) / 30 = 5 rental months

Therefore, the occupancy rate for your portfolio for the past years is:

(120 – 5) / 120 * 100 = 95.83%

This means your vacancy rate is 4.17%. Note that, despite having vacancy on four properties, the size of this portfolio mitigated the total risk and brought the occupancy rate up compared to the calculation using a single property. This is a perfect example of how building a sizeable portfolio can keep your total investment profitable, even if you experience unexpected issues on a few properties.

Spartan Rates: Second to None

Now that you know exactly how to determine the occupancy and vacancy rates of a single property or an entire portfolio, you’ll understand why Spartan is so proud of its current rolling 52-week 97.2% occupancy rate (as of July 29, 2016). Our short-term rates are even better, with our 13-week rate coming in at a solid 97.9%. With a portfolio of over 250 properties, our focus on keeping this number high is just one of the things that sets us apart from other turnkey outfits – well, that and our 100% money-back guarantee.

If you want to learn more about why our occupancy rates are the best in the business, or how Spartan can help you achieve your investment goals, contact us here and let’s see what we can accomplish together.

Categories: Blog

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