Shocking Truth for Rental Investors, They Usually Lose Dramatically More to Vacancy than Inflation
Did you know that most of our rental landlords lose 2-4 X more money to vacancy every year than they do to inflation, poor tenant issues, or even total repair costs? That is a shocking fact when we tell most people and it still continues to this day.
1 Month = 8% of the year’s revenue down the drain for a vacant house, but you still incur about 8% of the year’s expenses. Often more since vacant homes are subject to major problems as was well known during the great depression (and recession) when banks would ask owners to stay, rather than foreclose and the reason was the extreme costs and risks housing professionals know vacant real estate to be.
Vacancy in real estate is like an unchecked leak in your house—it’s slow, sneaky, and costly. It silently erodes profits, sometimes more than owners anticipate, leading to substantial losses in income. Many real estate owners overlook this menace, but as property managers and brokers know all too well, vacancy is a critical issue that can make or break an investment, particularly in residential real estate. The banking and building industries also struggle with vacancy, but their approach highlights a cautionary tale for residential owners to take heed.
The Financial Drain of Residential Vacancy
When a residential property sits vacant, every month is a month of lost rent, and that’s the most obvious cost. But there’s more lurking beneath the surface. Consider the ongoing expenses that don’t stop just because the property is empty: taxes, insurance, maintenance, and in some cases, utilities. Each day without a tenant is a day you’re paying for these out of your own pocket. According to some studies, extended vacancies can reduce annual profits by up to 20%—and that’s before accounting for additional costs like repairs and marketing.
Vacancy also increases the likelihood of deferred maintenance. Owners might be tempted to skip small repairs, thinking they can get away with it while the property is empty. Yet when tenants eventually come in, these “minor” issues often snowball into costly repairs or prolonged turnover periods, stretching vacancies even longer.
Vacancy in Other Industries: What We Can Learn
In banking, vacancy manifests as “idle capital.” When money isn’t being lent out or invested, it’s not earning interest or growing. Banks are well aware of this, which is why they aggressively seek to reinvest or lend their assets. They understand that capital sitting still is capital losing value. This principle directly translates to real estate—an empty property is wasted capital.
The building industry, similarly, fights vacancy in a different way. For builders, unsold units are a significant problem, and they often resort to price cuts or incentives to get units occupied quickly. Builders know the longer a property stays unsold, the more it becomes a financial liability. They are highly sensitive to the carrying costs of vacant properties, something many residential real estate investors could learn from.
Vacancy as a Key Concern for Owners
For property owners, the mindset often shifts too slowly when it comes to vacancies. They believe that reducing costs is the best way to enhance profitability. In reality, the opposite can be true. Reducing tenant quality or cutting corners on maintenance to save money often leads to longer vacancy periods and less desirable tenants, which ultimately costs more in the long run.
Instead, focusing on quality, maintenance, and swift tenant turnover is paramount. Treat your property like a hotel: Marriott doesn’t allow rooms to stay empty for long because they understand how vacancy kills revenue. Likewise, residential property owners should prioritize quick turnovers, invest in property upkeep, and price competitively. Marketing aggressively and ensuring tenant satisfaction are crucial steps in this battle against vacancy.
How Owners Can Take Control
The good news is, with the right management strategy, owners can keep vacancies at bay. Swift, proactive marketing and maintenance can make all the difference. Owners should implement policies that minimize the gap between tenants, such as beginning marketing campaigns a month before the current tenant moves out and addressing repairs immediately after a vacancy occurs.
In addition, using data-driven decision-making can help identify patterns that contribute to longer vacancies. For instance, if certain price points or property features lead to extended vacancy periods, owners should be flexible enough to adjust accordingly.
Ultimately, treating vacancy as a critical concern—not just a minor inconvenience—should be every property owner’s priority. The faster you fill your units with quality tenants, the sooner your investment starts paying off again.
