Vacancy Rate Assumptions

Vacancy is the window of time between tenants—the unit sits empty, generating zero rent while you still pay taxes, insurance, and maintenance. It is inevitable, it is costly, and it is the biggest wild card in rental property cash-flow projections. Professional investors use 5–10% as their assumptions; beginners often underestimate at 2–3%, leading to disappointing results.

Key takeaways

• National average vacancy: 5–7% (roughly 18–26 days per year per unit)
• Vacancy varies by market, property type, and tenant pool (tight markets have 3–5%, weak markets have 10–20%)
• For cash-flow underwriting, use 10% as a conservative reserve; actual results may be better
• Vacancy includes lost rent and turnover costs (cleaning, repairs, remarketing)
• Strong markets with high demand justify lower assumptions (5–6%); weak or emerging markets require higher (8–12%)

What counts as vacancy?

Vacancy has two components:

1. Physical vacancy: The days the unit sits empty between tenants. If a tenant moves out on May 31 and a new tenant moves in on June 15, that is two weeks of physical vacancy.

2. Turnover costs: The expenses incurred during the turnover. A property manager might spend $500 cleaning and minor repairs, $200 in online marketing, and 10 hours showing the unit (time cost). If you self-manage, the time is yours to value. Turnover costs are often underestimated.

In practice, vacancy rates in the real estate industry include both—days empty plus turnover costs amortized across all tenancies.

National vacancy statistics

The U.S. Census Bureau tracks rental vacancy rates:

• Recent years: 5.5–7.5% national average
• Single-family rental homes: 6–8%
• Multi-family apartments: 5–7%
• Variation by region: coastal metros often 3–5%, secondary markets 6–10%, weak markets 10–20%+

These are aggregate numbers. Your property's actual vacancy will depend on your specific market and property condition.

Vacancy by market type

Tight/high-demand markets (tech hubs, supply-constrained areas):

• San Francisco, Boston, New York, Washington DC, Austin (during boom years)
• Vacancy: 2–4%
• Reason: High renter demand, low supply, tenants queue to get in
• Risk: Rents can fall suddenly if demand weakens
• Example: Austin in 2021 had under 3% apartment vacancy; in 2024 (after oversupply), it rose to 6–8%

Normal/balanced markets (most secondary cities):

• Dallas, Nashville, Denver, Indianapolis, Phoenix, Atlanta
• Vacancy: 5–7%
• Reason: Moderate demand and supply; churn between tenants is normal
• Risk: Moderate; cycles between tight and loose
• Example: Indianapolis has held steady at 6–7% for a decade

Weak/declining markets (shrinking or economically depressed areas):

• Detroit, St. Louis, Gary, Pittsburgh, Youngstown
• Vacancy: 8–15%+
• Reason: Population loss, weak job market, abundant supply
• Risk: High; you may struggle to fill units or may need to lower rents
• Example: Detroit's vacancy has been 10–12% consistently; some neighborhoods exceed 20%

Over-supplied emerging markets (new construction overshooting demand):

• Austin in 2023–2024 (after years of apartment construction)
• Las Vegas post-2022 (oversupply of class-A apartments)
• Vacancy: 8–12%
• Reason: Too many new units chasing too few tenants
• Risk: High; rents may fall; expect units to sit longer between tenants

Turnover costs and lost rent

Vacancy is more expensive than the lost rent alone. Consider a $1,500/month apartment with two-week turnover:

Lost rent: 14 days × ($1,500 ÷ 30) = $700

Turnover costs:

• Professional cleaning: $200
• Paint touchup or minor repairs: $300
• Marketing (sign, online listings, virtual tour): $100
• Showing time (5 showings × 30 min, at $50/hour opportunity cost): $125
• Total turnover costs: $725

Total cost of vacancy: $700 + $725 = $1,425

For a $1,500/month property, a two-week turnover costs nearly a full month of rent. A 10% annual vacancy allowance on that property ($150/month × 12) is consumed by roughly 2.5 turnovers per year—meaning each turnover is slightly less costly on average.

Underwriting with vacancy assumptions

Professional investors use two-tier vacancy:

1. Turnover vacancy (5–7% of rent): Assumes normal churn. Every property experiences tenants moving out and new ones moving in. Account for lost rent and turnover costs.

2. Economic vacancy (additional 3–5% of rent): Assumes unexpected market weakness, tenant quality deterioration, or property condition issues. This is a buffer.

Combined, conservative investors use 10% for properties in normal markets, 8% for tight markets, and 12–15% for weak markets.

Real example: A four-unit building with $4,000/month rent ($48,000/year):

Conservative underwriting with 10% vacancy:

• Gross rent: $48,000
• Vacancy allowance: $4,800
• Effective gross income: $43,200

A more aggressive (riskier) underwriting with 5% vacancy:

• Gross rent: $48,000
• Vacancy allowance: $2,400
• Effective gross income: $45,600

The difference is $2,400/year in cash flow—7% of annual income. This is why vacancy assumption matters to underwriting.

Regional examples of vacancy assumptions

For a property in San Francisco (tight market, 3% actual average):

• Conservative assumption: 5% (accounting for rare but possible market shift)
• If you assume 3%, you are taking unnecessary risk

For a property in Memphis (normal market, 6% actual average):

• Conservative assumption: 8–10%
• If you assume 6%, you are betting that your property performs at market average with no margin

For a property in Detroit (weak market, 12% actual average):

• Conservative assumption: 15% (accounting for potential further deterioration)
• If you assume 12%, you are betting the city does not get worse

How to determine your property's likely vacancy

1. Research your specific market: Call local property managers, check apartment association reports, and ask commercial real estate agents for recent vacancy data. Most markets have 1–2 percentage points of variation from national average.

2. Assess your property condition: A brand-new, well-maintained property in good condition will lease faster than an older property with deferred maintenance or a bad location. Adjust your assumption accordingly.

3. Assess tenant quality: A property targeting high-income tenants ($80k+ household income) typically has lower turnover than one targeting lower-income tenants. But lower-income tenants are also more stable (less mobile, more entrenched in place).

4. Assess location desirability: A property in a downtown neighborhood with walkable amenities will lease faster than a remote or declining area. Properties near transit, employment, or universities are easier to fill.

5. Factor in market cycle: A property bought at the peak of a tight market (like Austin in 2021) faces higher risk of vacancy if demand softens. A property bought during weak demand (like Memphis in 2010) may see vacancy improve as the market tightens.

Conservative rule: Use a vacancy assumption 2–3 percentage points above your market's historical average. This avoids the trap of assuming you will perform at or above market average.

Vacancy and cash flow sensitivity

A small change in vacancy assumption cascades into large changes in projected cash flow. Consider a duplex:

• Gross rent: $2,400/month
• Operating expenses (excluding vacancy): 44% of rent = $1,056/month
• NOI before vacancy: $1,344/month

If vacancy assumption is 5%:

• Vacancy allowance: $120/month
• NOI after vacancy: $1,224/month
• Mortgage: $800/month
• Cash flow: $424/month

If vacancy assumption is 10%:

• Vacancy allowance: $240/month
• NOI after vacancy: $1,104/month
• Mortgage: $800/month
• Cash flow: $304/month

If vacancy assumption is 15%:

• Vacancy allowance: $360/month
• NOI after vacancy: $984/month
• Mortgage: $800/month
• Cash flow: $184/month

A 10 percentage point shift in vacancy assumption reduces monthly cash flow by 57%, from $424 to $184. This is why it is critical to be conservative in your assumptions.

Avoiding vacancy disasters

1. Never assume below-market vacancy: If your market averages 6%, do not model 4% unless you have strong reason (e.g., a new luxury unit in high demand). Avoid the temptation to be optimistic.

2. Build a cash reserve: Before buying a property, save 6–12 months of debt service. If vacancy exceeds expectations, you have a buffer to cover the mortgage.

3. Maintain property quality: A well-maintained unit leases faster than one in decline. Invest in paint, flooring, and appliances; it pays for itself in reduced vacancy.

4. Screen tenants thoroughly: A good tenant stays 3+ years; a bad one leaves after 8 months, costing you money. Screen rigorously.

5. Price competitively: If your property is sitting empty longer than comparable units, your rent is too high for the market. Lower it 5–10% and fill the unit; 95% of low rent is better than 80% of high rent.

Vacancy comparison by property type

Next

Vacancy is a hit to cash flow that happens between tenants. But there is also a longer-term cost to building age and deferred maintenance: capex. While vacancy is a temporary problem (solved by leasing the unit), failing to reserve for capex turns into a permanent problem (a building that deteriorates). The next article covers how professional investors reserve for major capital expenditure and plan for the inevitable replacement of roofs, HVAC systems, and water heaters.