How to calculate vacancy rate (and why your assumption is probably wrong)
Vacancy rate = (vacant days per year ÷ 365) x 100. Most investors default to 5%, but actual rates range from 3% in tight markets like Raleigh to 10%+ in softer ones like Memphis (class C). The number you plug in cascades through every downstream metric: NOI, DSCR, cap rate, and cash flow.
Ask ten investors what vacancy rate they use in their analysis, and eight of them will say 5%. Press them on where that number comes from, and most cannot answer. The 5% vacancy assumption is the most common unexamined input in rental property analysis, and it is wrong more often than it is right.
The formula
If your property sits empty for 25 days per year between tenants, the vacancy rate is 25 / 365 = 6.8%. But physical vacancy is only part of the story. You also lose rent during:
- Turnover time. Cleaning, repairs, showing, and lease signing between tenants. Even a fast turnover takes 10 to 21 days.
- Non-payment. A tenant who stops paying and takes 30 to 60 days to evict is functionally the same as vacancy.
- Concessions. A free month of rent to attract a tenant is effectively 8.3% vacancy for the year.
The useful number is economic vacancy: total lost rent from all sources divided by potential gross rent.
Vacancy rates by city and class
Vacancy is local. National averages are meaningless for underwriting a specific deal. These ranges reflect single-family and small multi-family rentals:
| City / market | Class A/B | Class C |
|---|---|---|
| Raleigh, NC | 3% to 5% | 5% to 7% |
| Charlotte, NC | 3% to 5% | 5% to 8% |
| Nashville, TN | 4% to 6% | 6% to 9% |
| Tampa, FL | 4% to 6% | 7% to 9% |
| Indianapolis, IN | 5% to 7% | 8% to 10% |
| Memphis, TN | 5% to 8% | 8% to 12% |
| Cleveland, OH | 5% to 7% | 8% to 12% |
| Detroit, MI | 6% to 9% | 10% to 15% |
Notice the pattern: markets with the highest cap rates (Memphis, Cleveland, Detroit) also have the highest vacancy rates. The yield is compensating you for the risk. Using 5% vacancy in a class C Detroit property is not conservative analysis; it is fiction.
How vacancy cascades through your analysis
Vacancy does not just reduce your top-line rent. It ripples through every metric downstream. On a $300,000 property renting at $2,200/month:
| 5% vacancy | 8% vacancy | 12% vacancy | |
|---|---|---|---|
| Annual gross rent | $26,400 | $26,400 | $26,400 |
| Vacancy loss | -$1,320 | -$2,112 | -$3,168 |
| Effective gross income | $25,080 | $24,288 | $23,232 |
| Operating expenses (40%) | -$10,032 | -$9,715 | -$9,293 |
| NOI | $15,048 | $14,573 | $13,939 |
| Cap rate | 5.0% | 4.9% | 4.6% |
| DSCR (at $1,600/mo debt) | 0.78 | 0.76 | 0.73 |
A 3-point vacancy difference (5% to 8%) drops NOI by $475 and DSCR by 0.02. Seems small. But at the margin, that 0.02 can be the difference between a 1.20 DSCR (approved) and a 1.18 (needs more down payment). The cascade is real.
How to find the right vacancy rate for your deal
- Check Census Bureau data. The ACS (American Community Survey) publishes rental vacancy rates by metro area. It is lagged by 1 to 2 years but directionally accurate.
- Ask local property managers. The best source. A PM with 200 doors in Indianapolis knows the real vacancy rate for that market better than any national dataset.
- Look at days-on-market for rentals. If similar rentals lease in 7 days, your turnover vacancy is minimal. If they sit for 30+, budget higher.
- Factor in your property class. Class A in a growth market? 3% to 5%. Class C in a Midwest city? 8% to 12%. Do not use the same number for both.
- Add a non-payment buffer. In markets with tenant-friendly eviction laws (New York, California, Illinois), add 1% to 2% for eviction-related lost rent.
The 5% myth
The default 5% vacancy assumption became popular because it is easy and it sounds conservative. But "conservative" depends on context:
- In Raleigh with a Class A property, 5% is slightly conservative (real vacancy closer to 3% to 4%). Fine.
- In Memphis with a Class C property, 5% is dangerously optimistic (real vacancy 8% to 12%). Not fine.
- In a market you do not know, 5% is a guess dressed up as analysis. Dangerous.
The right approach: use the actual local rate for the property class, then stress-test at 2 to 3 points higher. If the deal still works at elevated vacancy, it is resilient. Vacancy is just one line item; for a complete picture, see how to estimate all your operating expenses.
Frequently asked questions
What is a good vacancy rate for a rental property?
It depends on market and property class. Class A in a growth market: 3% to 5%. Class B in a balanced market: 5% to 8%. Class C in a cash-flow market: 8% to 12%. Lower is better, but use realistic numbers, not aspirational ones.
Should I use 5% vacancy in my analysis?
Only if the actual local vacancy rate for your property class is around 5%. In many markets it is higher. Using 5% universally is not conservative; it is lazy. Look up the real rate for your specific market and class.
What is the difference between physical and economic vacancy?
Physical vacancy is days without a tenant. Economic vacancy includes all lost rent: empty days, non-payment, concessions, and free rent periods. Economic vacancy is always equal to or higher than physical vacancy and is the better number for analysis.
How does vacancy affect DSCR?
Higher vacancy reduces effective gross income, which reduces NOI, which lowers the DSCR ratio. A 3-point increase in vacancy can drop DSCR by 0.05 to 0.10, potentially pushing a deal below the lender's threshold.
Where can I find actual vacancy rates for my market?
Census Bureau (ACS data), local property managers, real estate investor meetups, and rental listing platforms (check days-on-market for comparable rentals). A local PM with a large portfolio is the single best source.