In real estate, vacancy loss (sometimes called vacancy and credit loss) refers to the money that a property owner will not receive due to unfilled units or the non-payment of rent. While empty units certainly will not garner any income, property owners also must account for not only tenants not paying on time -- or at all -- but also the potential for the eventual levying of a vacancy tax.
How is vacancy loss calculated?
Annual vacancy loss is an estimate. While an experienced property owner might be able to see a vacancy trend over the years, a new property owner must come up with a conservative estimate that includes a vacancy provision to preserve their bottom line.
Just as a real estate investor must first check the comps before setting rental rates for a property, you should also do your research and find out how other similar properties are faring. This could be as simple as connecting and inquiring with a property manager, building owner, real estate agent, or another investor in your area and asking about their vacancy loss rates. Otherwise, you can calculate your expected vacancy loss using the national vacancy rate average, which is 6.6%, according to the U.S. Census Bureau.
To calculate your vacancy loss, use the following equation:
Gross income (annual) x vacancy rate = vacancy loss/100
For example, let's say your annual gross income from a rental property is $150,000. Using the average vacancy rate (we'll round up to 7% for easier math), here's how to calculate your vacancy loss:
150,000 x 7 = $1,050,000/100
At a 7% vacancy rate, your vacancy loss is $10,500.