What Is Vacancy Loss?
Vacancy loss is the rent you don't collect when units are empty. Formula: gross rent × vacancy-rate. A property with $4,000/month gross and 8% vacancy-rate loses $320/month. That $320 is deducted from gross to get effective-gross-income. Conservative-underwriting uses 8–10% vacancy in most markets. Ignoring it overstates noi and leads to overpaying.
Vacancy loss is the rental income lost when units are empty—between tenants, during make-ready, or due to prolonged marketing. It's a deduction from gross rent to arrive at effective gross income.
At a Glance
- What it is: Rent lost to empty units
- Why it matters: Reduces effective-gross-income and noi
- Formula: Gross × vacancy rate
- Typical rate: 5–10% depending on market
- Use it for: Deal-analysis, noi, break-even-occupancy
Vacancy Loss = Gross Rent × Vacancy Rate
How It Works
The math. Gross rent $48,000/year. Vacancy-rate 8%. Vacancy loss = $48,000 × 0.08 = $3,840. EGI = $48,000 − $3,840 = $44,160.
What drives vacancy. Turnover (time between tenants), make-ready (repairs, cleaning), marketing time, market softness. In a tight market (Memphis, Indianapolis), 5–7% might be realistic. In a soft market or with a difficult property, 8–10% or higher.
Economic vs. physical vacancy. Physical vacancy = units physically empty. Economic vacancy can include below-market-rent (you're "losing" the gap) and concessions (free rent). For deal-analysis, we usually mean physical vacancy—empty units.
Conservative approach. Use 8–10% unless you have strong market data. New investors often use 3–5%—that's optimistic and leads to overpaying.
Real-World Example
Ava in Memphis. Ava analyzed a 6-unit. Gross: $4,200/month. She used 8% vacancy: $336/month lost. Over 12 months: $4,032. EGI = $50,400 − $4,032 = $46,368. Her partner used 5% ($2,520 lost). His EGI: $47,880. His noi was $1,512 higher. At 6.5% cap, that implied $23,262 more "value." She stuck with 8%. The property had two turnovers in year one; actual vacancy was 9.2%. Her model was closer.
Pros & Cons
- Reflects reality
- Prevents overpaying
- Aligns with lender underwriting
- Conservative-underwriting
- Requires market-specific assumption
- Can feel pessimistic
Watch Out
- Underestimating: 3–5% is often too low; use 8–10% unless you have data
- Value-add: During lease-up, vacancy is higher—model it
Ask an Investor
The Takeaway
Vacancy loss is real. Use 8–10% for conservative-underwriting. Deduct it from gross to get effective-gross-income. Don't skip it.