The Cost of Vacancy and the Value of Pricing Rental Property Correctly

By Josh Kattenberg

What is the true cost of vacancy in rental property and what can rental property owners do to minimize this cost? Vacancy cost is a function of time.  The more time a property sits vacant, the more it costs. Let’s look at an example of a single family home renting for $1,000 per month.

Monthly rent = $1,000
Daily rent = $33.33
Annual rent = $12,000
The maximum annual rent is $12,000. If the property is vacant for one month out of the year, annual rent falls to $11,000 or $917/mo. If vacant for two months, annual rent would be $10,000 or $833/mo.

Like any commodity or product sold or traded on the free market, rent prices are controlled by supply and demand. If a rental property is priced above the current market value, more competitively priced properties will rent while the overpriced property will sit vacant. Several things happen to the over-priced property. 1) Even if the property owner eventually gets his or her asking price, because the property has been vacant for 1-2 months, the owner did not actually receive their asking price. If the owner was asking $1,000/mo. but the property was vacant for two months, the owner will actually only receive $833/mo.  2) Over-priced properties turn off qualified tenants. Once a prospective tenant calls on the property and finds it is over-priced, they will cross the property off their list and look elsewhere.  Even if the rental price is lowered a couple weeks later, those tenants will have already rented a property, or will not know that the price has been lowered. Over-priced rental properties exacerbate the loss of revenue due to vacancy.  3) The rental agent or property manager gets frustrated showing a property that is overpriced and therefore un-leasable.  They spend a lot of time and money showing a property that tenants simply will not rent at the current price. In addition, as every sales person knows, to be a good sales person, you must believe in your product. It is hard to believe in a product that you know to be overpriced.

When selling real estate, owners can often afford to wait until they received their asking price. Their property may appreciate, they continue to make principle payments, or they continue to live in the property.  However, an owner will never recover the revenue lost during the vacancy of a rental.

How to minimize the loss of revenue due to vacancy:
1)    Advertise.  Spending money on advertising is a good investment. Take the above example. If the owner would spend $200 on advertising, and as a result was able to rent his property one week sooner, the owner would have his advertising paid for.
2)    Price Competitively. Trying to get the rent to cover your mortgage is not the correct bench mark for setting the rent price. The market ultimately sets the rent price. If you are not getting calls, showings, and applications, be willing to lower the price sooner than later.
3)    Accept Pets. A large percentage of tenants own pets. By not accepting pets, you are now competing for pet free tenants with all the other owners who will not accept pets. If you absolutely will not accept pets, set your rent price very competitively.
4)    Improve your curb appeal. Making sure the property is clean, painted, and in good repair will decrease your vacancy time.
5)    Hire a property manager. Property managers focus all of their time on rental property.  If you only have few properties, you have other things on your mind. By not getting your property rent ready quickly, not advertising it aggressively, and not showing it to interested tenants often, you will lose enough money through vacancy that you could easily pay to have the property professionally managed.