Vacancy Rate
The percentage of time a rental property (or a market's units) sits empty and produces no rent. Investors subtract a vacancy allowance from gross rent to get effective income in their underwriting.
Vacancy rate is the share of potential rental income lost to units sitting empty. It can describe a single property (how much of the year it's unoccupied) or a whole market (the percentage of available units that are vacant). Either way, it's a core assumption in honest rental underwriting because no property stays 100% occupied forever.
Vacancy Rate = Vacant Time (or Units) ÷ Total Time (or Units)
Why it matters in underwriting
Gross rent assumes the property is always rented — which never happens. Tenants turn over, units sit empty between leases, and occasional non-payment occurs. Investors account for this by subtracting a vacancy and credit-loss allowance from gross potential rent to arrive at effective gross income, the top line of the NOI calculation:
Effective Gross Income = Gross Potential Rent × (1 − Vacancy Rate)
A worked example
A property with $30,000 gross potential annual rent, underwritten at a 5% vacancy assumption:
Vacancy loss = 30,000 × 5% = $1,500
Effective gross income = 30,000 − 1,500 = $28,500
That $28,500 — not the full $30,000 — is what flows into NOI and your true return math.
Typical assumptions
Most investors underwrite 5–10% vacancy depending on the market and property type, even if the unit is currently occupied. Stable, high-demand markets justify the low end; softer markets, higher-turnover rentals, or short-term rentals warrant more. Pulling the local market vacancy rate (from census data, property managers, or market reports) grounds the assumption in reality rather than optimism.
Vacancy vs. DSCR
Important nuance: the standard DSCR calculation lenders use divides gross market rent by PITIA — it does not subtract vacancy. So a property can pass the DSCR test on gross rent yet still be a thin investment once you account for realistic vacancy in your own analysis. Vacancy is part of your underwriting discipline, not the lender's qualifying ratio.
Practical takeaway
Never underwrite a rental at 100% occupancy. Building in a realistic vacancy allowance is what separates a sober pro forma from a fantasy one. The cost of being too optimistic on vacancy is a deal that looks great on paper and disappoints in the bank account. Use the local market rate, lean slightly conservative, and remember that turnover costs (make-ready, leasing) compound the effect of each vacancy.
Frequently asked questions
What vacancy rate should I use in my analysis?
Most investors underwrite 5–10% depending on the market and property type, even for a currently occupied unit. Stable, high-demand markets justify the lower end; softer markets, high-turnover rentals, and short-term rentals warrant more. Pull the local market vacancy rate to ground the assumption in reality.
Does the DSCR calculation account for vacancy?
No. The standard DSCR lenders use divides gross market rent by PITIA, without subtracting vacancy. So a property can clear the DSCR test on gross rent yet still be thin once you factor realistic vacancy into your own underwriting. Vacancy is part of your analysis, not the lender's qualifying ratio.
How does vacancy affect NOI?
Vacancy reduces the income side. You multiply gross potential rent by (1 minus the vacancy rate) to get effective gross income, then subtract operating expenses to reach NOI. A higher vacancy assumption lowers effective income and therefore NOI, cap rate, and your projected return.