Vacancy rate is the percentage of a year a rental unit is vacant, but how do you calculate the vacancy rate for a multifamily property or portfolio of any size? If you take a simple average of all the individual unit vacancy rates you will be missing something – not all vacancies impact your investment return equally. When a pricier unit goes vacant, your investment return takes a bigger hit compared to when a less expensive unit goes vacant.
For example, let’s say you own duplex consisting of a house that rents for $4800 per month and a one bedroom unit that rents for $1500 per month. When the house is vacant you are missing out on $160 per day of rental income. When the one bedroom unit is vacant you are missing out on $50 per day of rental income. Clearly it would not make sense to average the vacancy rates for these two units. Calculating a simple average of the two unit’s vacancy rates would be useless in helping you assess your duplex’s performance.
Instead you should calculate the weighted average of these two units’ vacancy rates. A weighted average accounts for differences in rent amounts by giving each vacancy a weight that corresponds to the impact each unit’s vacancy has on your investment return. The weighted average is the effective vacancy rate for your entire multifamily property and it takes into account varying rent amounts.
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