Property investors often focus on metrics like rental income, property value appreciation, and cash flow, all of which are super important, but if you’re just looking at these, you’re really just looking to pat yourself on the back as these measures in silo do little to provide insight into inherent risks in the market at a point in time. Measures that provide you with perspective on market conditions are equally important to keep across, especially in economic conditions where inflation and government intervention (through interest rate hikes and levies) are influencing markets. Measures such as incoming supply, days on the market, capital growth trends and inventory are all measures that provide that much-needed insight into market conditions.
However, I wanted to focus on another powerful measure that’s easy to get your head around, and that’s ‘vacancy rates’. Not only does this measure feature regularly across media property updates, but it’s also an integral measure for investors to assess the health of a market. Understanding and effectively managing vacancy rates is essential for long-term success in property investment and so we’ll take a look at this measure in more depth as well as ways to manage it.
So, what are vacancy rates?
Vacancy rates refer to the percentage of unoccupied rental properties in a specific area. The equation is simple, ‘how many vacant properties are available’ across ‘the total number of available rental properties’.
If vacancy rates are high (typically up to 3%+), they can have significant implications for property investors, mainly impacting the rental income. If the supply is high of properties up for rent, there is more competition for ‘houses up for rent’ in the market. One lever landlords typically use is price which if reduced can create demand. A good idea especially since a week’s vacancy impacts the annual income of a property by ~2%.
Vacancy rates can be influenced by several factors; common influences can range from demand for a location (due to wanting to be close to universities or the beach) and incoming supply changes from new developments or relaxed council rules. Other more macro demand drivers include population growth, employment opportunities, and infrastructure development.
The good news is, there are ways to manage vacancy rates. This is broken down into two strategies dependent on your investment stage, (a) those that are looking to acquire a new property or (b) those that hold an existing property.
Strategies to mitigate vacancy rate when acquiring a new property can be broken down into three main plays;
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Market Research and Analysis: You can find free data sources that show vacancy rates however the data can be out of date. With the Vacancy rate being a volatile measure and requiring recency of data, you may look to paid subscriptions to conduct your research.
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Diversifying Investment Portfolio: If you own investment properties already, a good mitigation strategy is to diversify your properties based on regions, states or even types of property. This diversification strategy can help reduce the risk to your portfolio from high vacancy rates and inherent volatility.
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Selecting the right tenant profile: Accepting tenancy based on their suitability and the longevity of tenancy is a good way to manage vacancy as opposed to accepting tenancy based on a higher rental income return. You can also offer long-term rental agreements incentivise the right tenants to commit to extended leases as well.
In terms of strategies to mitigate vacancy rate when holding an existing property, a common approach is to ensure you have a good property manager and conduct regular maintenance on the property. Also, responsiveness to tenancy communication can contribute to tenant satisfaction resulting in reduced vacancy. Another useful strategy is to develop a contingency plan or financial buffer to cover expenses during periods of vacancy. Proactively managing vacancy rates is crucial for maximizing returns and mitigating risks in property investment.
By understanding the impact of high vacancy rates, analyzing location and property type dynamics, and implementing effective strategies, property investors can adapt to changing market conditions and thrive in the long term. And if they’re in a region that’s experiencing increased vacancy rates, they can proactively do things to support longer tenancy. Final note, always stay informed, be proactive, and continuously monitor market trends to make informed investment decisions.
If you have further questions or would like personalized guidance tailored to your unique circumstances, don’t hesitate to get in touch with Citadel Property Agency. We are here to help you navigate through all the complexities of property investing, ensuring you make well-informed decisions that align with your investment goals. Reach out to us today for a complimentary consultation today and explore your options.