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Is Vacancy Rate an Indicator of Potential Capital Growth?

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Vacancy Rate is the percentage of rental properties currently vacant in a suburb. For instance, when there are 500 rental properties in a suburb and ten are vacant, the result is a Vacancy rate of 2%. (10/500 x 100).

What’s the first thought when one says, ‘Vacancy Rate’? It is Cash Flow. If you cannot survive with a property that is not tenanted for a few months, then it’s time you want to perhaps take a closer look at Vacancy Rates.

How Vacancy Rate Affects Cashflow?

A rental property’s vacancy rate directly affects rental income, influencing cash flow and investment returns. Thus, a knowledge of vacancy rates helps investors calculate approximately their cash flow and return on investment.

It is practical to always consider the vacancy rate to anticipate the real cash flow of the rental income of a property. Thus, your calculation should be –

Rental income less vacancy rate less expenses = your potential cash flow.

Vacancy Rate as an Early Indicator of Potential Capital Growth

The Vacancy rate is more than just cash flow. It is actually an early indicator of the potential for capital growth.

Here’s why:

When there’s a suburb location that is experiencing some changes, perhaps gentrification – like new buildings, new schools, new infrastructure and a commercial centre under transformation — ultimately making the location more attractive and interesting, you will note that the first people who capitalize on these kinds of changes are the tenants. And why? Because tenants are far quicker and more alert than owner-occupiers and investors. They are more agile and freer to move, as they are more likely not tied up to any mortgage.

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So as tenants move into the suburb, vacancy rates move and drop. Thereby making the location more appealing to investors, and eventually — to owner-occupiers. It just usually takes longer for owner occupiers to make an action as there are more things to organize. But really, the combined interest of tenants, investors and owner occupiers can greatly influence the movements in the suburb’s market.

With the above scenario – as the vacancy rates go down, the increasing interest from owner- occupiers and investors can drive the prices to go up. (Prices going up = capital growth) So, this explains why low vacancy rates can be considered an early indicator of the potential for capital growth.

Vacancy Rate = 3% as the industry standard for a market imbalance

The property investors’ interest is in the lower vacancy rates, typically at 2%. Some locations are pegged at 1% or maybe tighter.

But vacancy rates can be volatile at times, which means it can be 4% at one point, then plunging to 2% in the next month. This kind of unpredictability in vacancy rates is primarily evident in thinly-traded markets.

Let’s say, for instance, there are 100 rental properties in a suburb. If two properties are presently not rented out, the vacancy rate would be 2%. If another 2 appears on the market for some reason, then the vacancy rate becomes 4%. Note that it has doubled in just a month. And the following week, they could all be let, and you’re left with 0% vacancy rate.

As you can see from the example, it can really go through extreme volatility in some instances.

When looking at vacancy rates, it is essential, therefore, to look at the historical trend to see how the rate has moved in the last 6 – 12 months. This will give you a better indication on the suburb’s rental market.

There are cases where you may find inconsistent vacancy figures, as this is dependent on the data provider giving out the vacancy rate. So, it is imperative to check and compare the data from various sources and contact the real estate agents and the property managers in the suburb too, to find out how the rental market is really going.

Check out “Crunching the Numbers: Positive Cash Flow vs. Negative Gearing

How to Calculate Vacancy Rates

To calculate an area’s vacancy rate, the first thing you need to do is to check the number of properties for rent in the area and how many are currently listed as available for rent. You can access this information from sources like the property portals and the Australian Bureau of Statistics. Once you are there, make estimates and follow through for a certain period to get a better indication.

Choosing the ideal location for one’s needs means you must gather the data and match this against 15,000 suburbs. And this obviously is quite a challenging task, even for the excel spreadsheet data expert in all of us.

But fret not – this task becomes more manageable with our suburb analytics research tool, SuburbsFinder. How does this work? Check the Vacancy Rate data for 15,000+ suburbs split by houses and units in the SuburbsFinder Dashboard. Well, what do you know? If all the other indicators support a low Vacancy Rate figure, then you could easily be the one to spot a suburb with a high potential to become a hotspot in no time.

A note of caution with Vacancy Rate

It is tough to do a workaround for a suburb’s vacancy rate because several data providers issue the Vacancy rates based on just postcodes (and some postcodes have more than 100 suburbs). Therefore, one will need to further drill down to extract data for the different kinds of properties in a specific suburb. So, it can be a challenge indeed to formulate estimates correctly.

Note that property managers also list their properties currently tenanted as up for leasing or available in the future, so this potentially discards your Vacancy Rate calculation.

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Conclusion

Several factors influence both the property prices and the potential for capital growth. If you can fully understand such factors, including the different capital growth indicators, it can dramatically lessen the risk of having a bad investment decision.

What’s existing now are the 15,000 suburbs in Australia, that quickly translates to 30,000 property markets considering the units and the house markets per suburb. Regardless of the macro property market’s activities, there are micro markets that are always out there – that could lead you to one specific street in a certain suburb. The key in finding these nugget suburbs is by comparing the information for all the 15,000 suburbs, including the 30,000 markets, against each other, so ranking takes place, and the best of the best will be evident. To fully grasp the data and its relevance in seeking and pursuing your selected suburbs means working with all the ready information and understanding them, as you crunch the numbers.

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