The risk of vacancy in investment properties

Rental property can provide a passive income stream while you build equity and the property appreciates — plus tax benefits that help lower your tax liability. Of course, just because you own rental property doesn’t guarantee 100% occupancy. Vacancies can be a nightmare for real estate investors, not only because of the loss of cash flow, but also the time and effort it takes to relist the property and find new tenants. Fortunately, there are ways to lower or even eliminate vacancy risk.

What Is Vacancy Risk?

Vacancy risk is the possibility that you won’t have a paying tenant in your rental property. Without a tenant, there’s no cash flow. And that leaves less money to pay monthly expenses like the mortgage, insurance, taxes, utilities, and the like. One of the best ways to avoid vacancy risk is to buy rental property that’s in a good location with high demand — and price it within the market range.

Vacancy Risk in a Recession

Many people own rental properties to bring in extra income and diversify their investment portfolios. But what happens to rental properties — and the risk of vacancy — during a recession (or pandemic)? In general, the housing market takes a bigger hit than the rental industry during a recession. That’s because, during a recession, fewer people can afford homes and qualify for mortgages, which creates a higher demand for rentals. While things could head south, rental properties often continue to provide owners with a steady income stream no matter what the economy is doing.

Vacancy Pain Points

While vacancies are troublesome for a variety of reasons, here are a few of the key pain points:

• Loss of income. Rental property vacancies can end up costing landlords thousands of dollars a month in lost rents. That’s especially problematic if you depend on that rental income to cover the property’s mortgage, taxes, HOA dues, insurance, utilities, and the like.
• Turnover costs. In addition to the lost income, there are out-of-pocket costs associated with tenant turnover. For example, you may be on the hook to cover the costs to:
• Clean the property
• Repair any damage
• Create advertisements
• Hold open houses
• Set up showings
• Process and screen applicants
• Time and effort. Vacancies are expensive, but they also cost landlords a lot of time and effort to orchestrate. It can be even worse if you live out of town and are trying to manage the home remotely.
• Property management fees. Some owners hire professional property managers to handle everything from finding tenants and collecting rent to taking care of maintenance requests. However, not all owners are comfortable handing over the reins to someone else — and paying a fee that averages 8–12% of the monthly rental value of the property, plus expenses.

What Is the Average Vacancy Rate?

Hotels and apartment complex owners use vacancy rate to measure the percentage of available units during a given time. To calculate vacancy rate, you multiple the number of vacant units by 100 and then divide by the total number of units. For example, if an apartment building has 100 units and 85 are occupied, the vacancy rate would be 15%.

If you own single-family rental property, vacancy rate works differently. For independent landlords, vacancy rate typically refers to the percentage of available units within a specific real estate market. For example, if a city has 100,000 rental units and 95,000 are occupied, the vacancy rate would be 5%. According to the U.S. Census Bureau, the rental vacancy rate in the U.S. is about 6.8%. Overall, vacancy rates in urban, suburban, and rural areas today are at their lowest levels since the early 1990s.

In general, a high vacancy rate signals that the area isn’t attractive to renters for some reason, such as high costs, lack of conveniences and amenities, or a poor local job market. Conversely, low vacancy rates indicate that there’s a strong demand for rental units in the area. If you’re shopping for rental property, it’s essential to prioritize location since that plays a key role in the property’s success. If you already own property — and it’s not in an ideal location — there are other ways to make the property more attractive to potential tenants.

How to Avoid Vacancy (and Keep Your Tenants Happy)

Rental property vacancies can cost owners a lot of time and money. The good news is that there are ways to lower your risk of vacancy. Here are six options:

Screen prospective tenants. One of the best ways to avoid vacancy is to have a careful and consistent process for screening potential tenants. This helps lower the risk of late payments, missed payments, property damage, eviction, and high turnover. In general, you should run checks on each applicant’s income, credit history, criminal history, and eviction history. It’s also a good idea to require (and verify) landlord and employment references.

1. Keep rents fair. If your rental is priced too high, it could be challenging to find and keep renters. Stick to the fair market price when setting and raising rents.
2. Maintain your property. Properties that look clean and well-maintained are easier to rent out than ones in poor condition. Stay up-to-date with repairs and maintenance to keep your property in tip-top shape.
3. Respond to tenant requests. One of the most common complaints made by tenants is that landlords ignore their requests or take too long to respond. To keep your tenants happy, respond as quickly as possible to requests.
4. Stay current with trends. Your property will be more attractive if you update or upgrade it with amenities that renters want. In today’s rental market, that might include features like hardwood flooring, new appliances, onsite laundry, outdoor living spaces, and assigned parking.
5. Be approachable. Touch base with your tenants (or property manager, if you have one) often to find out if anything needs your attention. An open line of communication enables others to approach you with any concerns — and makes it easier for you to thwart any potential problems.

How Flock Can Help

While there are ways to lower your risk of vacancy, Flock makes it possible to eliminate the risk altogether. Whether you inherited a property you don’t want to manage, or you’re tired of the hassles, headaches, and uncertainties of being a landlord, we can help.

By joining Flock, you get tenant diversification, which means you’ll never have a vacancy again. It’s the first solution that offers passive ownership, diversified income, and price appreciation. Submit your property for an estimate or contact us to learn more.