The Real Cost of Vacancy

Most rental calculators — including the ones on this site — build in a vacancy reserve, usually around 5%, as a flat haircut off gross rent. It is a reasonable modeling shortcut. But it understates what a real vacancy costs, because an empty unit is not "5% less rent" spread evenly across the year. It is a concentrated hit that arrives all at once, plus a set of costs a percentage does not capture at all.

What the vacancy reserve is actually modeling

A 5% vacancy reserve is a long-run average, not a prediction. The logic is an insurance premium's: over many years and many tenants, if a unit sits empty for roughly two to three weeks a year on average, 5% is a fair number to bake into underwriting. It is not saying you will lose 5% of every month's rent — it is saying that, averaged over time, the income lost to actual vacancy works out to about that.

The distinction matters because averages do not arrive in instalments. A property can run fully occupied for three years and then absorb an entire turnover in one month. The underwriting was right and the bank balance still takes the hit all at once, which is a reserves problem rather than a modeling one.

The costs a flat percentage doesn't capture

• Turnover costs. Cleaning, painting, minor repairs and re-listing between tenants. Even a well-maintained unit needs some refresh between leases, and that cost lands entirely in the vacancy month.
• Leasing costs. A leasing fee to a manager or agent, often half a month's rent or a full one, on top of the rent already being lost during the search.
• Utilities during the vacancy. Someone pays the electric and water while the unit sits empty and is being shown, and it is the owner.
• Time-on-market drift. If a unit takes longer to fill than expected — priced wrong, a softer market, or bad timing — the actual vacancy can run well past the two or three weeks a 5% reserve assumes.

A more concrete way to think about it

These figures are illustrative — a teaching example, not market data for any particular city. They describe a unit renting at $2,000 a month, which is why the half-month leasing fee is $1,000.

Against $24,000 of annual gross rent, that single event is about 12% of a year's income — well above the 5% reserve most underwriting uses, because the reserve is an average across many years rather than a match for any one event. The arithmetic works out over a long enough hold. It just means a single bad vacancy year feels considerably worse than the spreadsheet implied, which matters for how much cash you keep on hand rather than for how you underwrite the purchase.

Notice also how little of that total is lost rent. Of the $2,955, only $1,385 is the empty weeks; the other $1,570 is work and fees that a vacancy percentage does not model at all. Doubling your vacancy assumption from 5% to 10% would not capture it, because it is not a rent problem.

The arithmetic of keeping a tenant

Once you have a number for what a turnover costs, a question that usually gets answered by instinct becomes answerable by arithmetic: is it worth pushing the rent at renewal if doing so might cost you the tenant?

A $50 a month increase earns $600 over a year. A turnover on these figures costs $2,955. If raising the rent by $50 triggers a move-out, it takes just under five years at the higher rent to recover what the turnover cost — and that assumes the replacement tenant pays the new rent and stays. A $100 increase shortens that to about two and a half years, which is a different proposition.

This is not an argument for never raising rent; a unit held well below market for years is its own kind of loss, and a tenant who would leave over $50 was not a long-term tenant. It is an argument for pricing renewals deliberately rather than reflexively, because the cost of being wrong is several times larger than the increase at stake.

Seasonality, and why December is expensive

Vacancies are not evenly distributed through the year. In most markets, demand for rentals is strongest in late spring and summer, when families move between school years, and weakest in late autumn and winter. A unit that falls vacant in June may let in a fortnight; the same unit falling vacant in December can sit for a month or more, at a rent concession, because the pool of people moving is simply smaller.

The practical consequence is in lease timing rather than in the reserve. A twelve-month lease signed in December expires in December, and renews that exposure every year. Offering a slightly longer or shorter initial term to move a lease's anniversary into the stronger season is one of the cheapest risk reductions available to a landlord, and it costs nothing but a conversation at signing.

What actually drives your turnover rate

The reserve percentage follows from how often tenants leave, which is partly outside your control and substantially inside it. Property type and location set a baseline — a small unit near a university turns over more than a three-bedroom house in a school district, regardless of how either is run. Beyond that, the levers are responsiveness to maintenance requests, the condition the unit was let in, and whether renewal terms are handled as a negotiation or an ultimatum.

Where the baseline turnover is genuinely higher — short holds, a value-add play where you intend to re-tenant, or a house hack where an owner-occupant transition is coming — the honest move is to underwrite a higher vacancy percentage rather than to hope the default covers it. The rental analyzer takes vacancy as an input precisely so it can be set to the property rather than to a convention.

What this means for underwriting

Two practical conclusions. First, keep a real cash reserve outside the deal, separate from the down payment, sized for a full turnover event rather than for a percentage of one month's rent. On these figures that is roughly $3,000 per unit, not $100. Second, read the vacancy line in any underwriting as what it is — a long-run average smoothed across years — and then ask the separate question of whether you could fund the event in the year it lands. Our note on realistic return targets covers stress-testing a deal against exactly this kind of ordinary bad year.