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Investment Property Vacancy FactorWhen evaluating an investment property for purchase, the use of a "vacancy factor" is needed in order to develop a realistic picture of the property's actual income. If it is not used, then it's almost a sure bet that the property will not produce the income that may be stated by the owner or owner's agent.
So, to account for this lost rental income, a certain reduction factor is applied to reduce the property's "full occupancy" income. The full occupancy income of an investment property is known as its "schedule gross income". This is the unrealistic income figure that many sellers and agents will specify as the income that’s actually produced by their property.
Average vacancies for residential rental properties range anywhere from 5 - 10%. If you operate a well kept property in a desirable area and charge market level rents, then a vacancy rate of 5% for the year can be expected. Higher vacancies can be experienced for poorly maintained properties and/or properties that are located in undesirable areas.
Example:
A well-kept four-unit apartment house located in a desirable area has an annual schedule gross income of $40,000. What is its actual income using a 5% vacancy-factor?
Real Income Produced = $40,000 x ((100-5)/100)
Using the 5% factor for vacancies reduces the building's annual rental income by $2,000. This reduced income figure is one of the criteria that should be used when evaluating the property for purchase. That’s the actual income that will pay the bills. Also, the vacancy factor also includes collection losses for any tenants who fall behind on paying rent.
So, the use of a vacancy-factor will act as your "safety-net" by accounting for vacancies and uncollected rents.
For more in-depth information on this subject, please visit The Landlord's Library book collection. It contains great information on the complete subject of residential landlording.
Return from Vacancy Factor to Investment Property
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Just as its name implies, the vacancy factor accounts for vacancies that occur during the year for an investment property. Vacancies can happen from time to time and are a fact of life with investment property. Their affect naturally reduces the property's annual rental income.