Vacancy

What it is

Vacancy is any period a rental unit sits without a paying tenant. Turnover between leases, eviction, rehab, marketing — all of it counts. When a unit is vacant, the rent goes to zero but the mortgage, insurance, and taxes don’t stop.

Why it matters

The beginner math for a rental is rent minus PITI equals cash flow. The professional math subtracts vacancy first.

On a real portfolio, I use about 7% vacancy in my underwriting. My P&L from a portfolio of 16 single-family homes showed about $150K in gross rent with around $60K in total expenses — maintenance, management fees, legal, and everything else. Vacancy is baked into that. What people miss is that a single bad tenant year can blow your vacancy number for that unit way above 7%. The portfolio average might hold, but any individual property can swing hard.

Here’s how I think about it. If I can conservatively underwrite a deal to be zero cash flow or a little bit positive, I’ll buy it. Never negative. Because the other three wealth engines — appreciation, depreciation, and tenant buydown on the mortgage — are still running even when cash flow is tight. I’m not looking at cash flow as the big piece. The big piece is equity. But I’m not going to buy something where the cash flow is negative because that’s stealing from everything else.

That said, property management actually helps with vacancy in a weird way. As a self-manager, you can choose your tenants more carefully. You can decide who you want to work with. A property management company has company-wide policies, equal housing, first come first served. As the owner managing personally, you pick the specific type of tenant that’s going to stay longer. I’d probably get 5-10% better vacancy numbers self-managing, plus lower eviction costs and lower maintenance because tenants who stay longer take better care of the place.

How it shows up

On my cash flow calculator at tools.solohouseflipper.com, vacancy gets pulled in automatically when you underwrite a rental deal. I figure in vacancy, maintenance, property management, and capex together — that’s how you get an honest number. A lot of people just look at rent minus mortgage and think they’re making money when they’re actually barely breaking even or losing.

The practical stuff that reduces vacancy: start showing the unit 30 days before the current tenant moves out, not the day they hand you keys. Price the unit at market. One week overpriced on the listing costs you more than a small rent reduction. Run your background check quickly — good applicants don’t wait around.

And keep cash reserves. When a unit goes vacant for three weeks, that mortgage payment is coming from somewhere. If it’s coming from your personal account and you only own one or two properties, you’re going to feel it. The reserve account is the buffer.

Related

31 percent rule, cash flow, tenants, property management, wealth engines, tenant buydown