Most rental property spreadsheets have a vacancy line, and most of them get filled in the same way: 5%, sometimes 8%, dropped in because it's the number a template defaulted to or a mentor once mentioned. It's rarely based on the actual property, the actual submarket, or the actual turnover pattern the investor is about to inherit. That gap between the assumed number and the real one is exactly where a deal that looked fine on paper starts losing money.
Why It Matters
Vacancy rate isn't a rounding error in your underwriting — it's a direct hit to gross scheduled rent, which is the number every other metric in your analysis is built on top of. Understate vacancy by even a few points and your projected cash flow, cash-on-cash return, and DSCR all come out looking better than the property will actually perform. That's not a minor miscalculation; it's the difference between a deal that clears your investment criteria on paper and one that would have been rejected if you'd used a realistic number from the start.
The investors most exposed to this aren't the ones ignoring vacancy entirely — it's the ones who include it, feel like they've accounted for the risk, and stop there without checking whether their assumed rate has any relationship to the property in front of them.
Physical Vacancy vs. Economic Vacancy
These two numbers are often used interchangeably, and they shouldn't be.
Physical vacancy is the simplest version: the percentage of time a unit sits empty. If a unit is vacant 18 days out of a 365-day year, its physical vacancy rate is roughly 5%. This is the number most vacancy assumptions are actually describing, whether the investor realizes it or not.
Economic vacancy is the more complete — and usually higher — number. It captures every dollar of scheduled rent you didn't collect, not just the days a unit was physically empty. That includes lease concessions offered to fill a unit faster, unpaid rent from a tenant who stopped paying before you started an eviction, uncollected balances left behind after a tenant moves out, and the lost rent from any period a unit was occupied but not producing income at the full scheduled rate.
A property can have a low physical vacancy rate and a meaningfully higher economic vacancy rate if it has a pattern of late-paying or non-paying tenants. Underwriting off physical vacancy alone is how a property with real collection problems still pencils out on paper.
How to Calculate Your Actual Vacancy Rate
For a property you already own, the calculation is straightforward: divide the rent you didn't collect over a period (vacant days' worth of rent, plus concessions, plus unpaid balances) by the gross rent that period should have produced if every unit had been fully occupied and paying at full rate the whole time. That figure — not a generic percentage — is your real economic vacancy rate, and it's the one that should be driving your reserve and your underwriting on the next deal.
For a property you're evaluating to buy, you don't have that history yet, which is exactly why a generic default is so risky. Pull actual local vacancy data for the submarket and property type — not a national average — and weight it against anything you can learn about the specific unit's rent-to-market positioning, condition, and turnover history from the seller or listing agent.
Why Investors Underestimate It
National averages don't apply locally. A national vacancy figure blends markets with very different fundamentals. A submarket with heavy new supply coming online can carry a vacancy rate meaningfully above the national number, and using the national figure there will understate your risk every time.
Turnover-driven vacancy gets forgotten. Every turnover comes with a leasing window — time to clean, repair, market, and place a new tenant — and that window is vacancy, even though it's rarely modeled as its own line item. A property with frequent turnover carries structurally higher vacancy than one with long-tenured tenants, independent of the market's overall rate.
Economic vacancy gets left out entirely. Many investors budget only for physical vacancy and never account for concessions or uncollected rent, which quietly understates the real number even in a market with strong occupancy.
Seasonal patterns get averaged away. A property that leases slowly in winter and quickly in summer can have a healthy annual average while still producing a rough few months that a flat annual assumption doesn't prepare you for.
Common Mistakes
Using a template default without checking it against the property. A 5% assumption inherited from a spreadsheet template is not underwriting — it's a placeholder that was never replaced with real data.
Modeling only physical vacancy. Ignoring concessions and uncollected rent after move-out means your vacancy line is quietly incomplete, even when the physical vacancy number itself is accurate.
Not adjusting vacancy assumptions for expected turnover frequency. A unit you expect to turn every year needs a higher vacancy assumption than one with a tenant likely to renew multiple times.
Treating vacancy rate as a fixed input instead of tracking it. Once you own the property, your assumed rate should get replaced by your actual trailing rate — most investors set the assumption once at purchase and never revisit it.
Best Practices
- Pull submarket-specific vacancy data, not a national average, when underwriting a new acquisition.
- Model physical and economic vacancy as separate figures, and budget for both.
- Adjust your vacancy assumption for the property's expected turnover frequency, not just the market rate.
- Once you own the property, replace the assumption with your actual trailing 12-month vacancy rate and update it at least annually.
- Size your vacancy reserve off your real number, not the number you underwrote with — the two should converge, but often don't until someone checks.
How ProfitTrackr Helps
Every month of rent you log — or don't — is the raw data your real vacancy rate is built from. ProfitTrackr ties income entries to the specific unit and period they cover, which means your actual physical and economic vacancy rate is something you can pull directly from your own records instead of estimating from a market average. That's the number that should be driving your reserve, and the one worth checking against your original underwriting assumption the next time you're evaluating a similar property.
Key Takeaways
- A generic 5% vacancy assumption is a placeholder, not underwriting — replace it with submarket-specific data before you rely on it
- Economic vacancy (lost rent from concessions and non-payment) is usually higher than physical vacancy (empty days) and both matter
- Turnover frequency drives structural vacancy independent of the broader market rate — a unit that turns often needs a higher assumption
- Once you own a property, track your actual trailing vacancy rate and use it to correct your original assumption
- Understating vacancy overstates every downstream metric — cash flow, cash-on-cash return, and DSCR all inherit the error
Related articles: Turnover Costs Between Tenants: The Line Item Landlords Underbudget | Tenant Screening: The Criteria That Actually Predict a Good Tenant