The Real Cost of Vacancy

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

What the vacancy reserve is actually modeling

A 5% vacancy reserve is a long-run average, not a prediction. It's the same logic as an insurance premium: over many years and many tenants, if a unit sits empty for roughly 2–3 weeks out of every year on average, 5% is a fair number to bake into underwriting. It's not saying you'll lose 5% of every month's rent — it's saying that, averaged over time, the lost income from actual vacancy periods works out to about that much.

The costs a flat percentage doesn't capture

• Turnover costs. Cleaning, painting, minor repairs, and re-listing between tenants. Even a well-maintained unit typically needs some refresh between leases, and that cost lands entirely in the vacancy month.
• Leasing costs. A leasing fee to a property manager or agent, often equal to a half or full month's rent, on top of the rent itself being lost during the search.
• Utilities during the vacancy. Someone has to pay the electric and water bill while the unit sits empty and being shown — usually the owner.
• Days-on-market drift. If a unit takes longer to fill than expected — because it's priced wrong, the market softened, or the timing is bad (nobody wants to move in December) — the actual vacancy period can run well past the 2–3 weeks a 5% reserve assumes.

A more concrete way to think about it

Against $24,000 in annual gross rent, that single event is about 12% of a year's rent — well above the 5% reserve most underwriting uses, because the reserve is an average across many years, not a match for any one event. The math works out over a long enough hold. It just means a single bad vacancy year can feel a lot worse than the spreadsheet implied, which matters for how much cash reserve you keep on hand, not for how you underwrite the purchase.

What this means for underwriting

Two practical takeaways: first, keep a real cash reserve outside the deal itself — separate from the down payment — sized for a full turnover event, not just a percentage of monthly rent. Second, when modeling a value-add or house hack where tenant turnover is more likely (shorter holds, owner-occupant transitions), consider using a higher vacancy percentage than the 5% default, since the underlying turnover frequency is genuinely higher.