Vacancy Rate Formula: Physical vs Economic (and Which to Use)

Vacancy rate is the most-misquoted number in rental real estate. Investors underwrite to "5% vacancy" because they read it in a book. Property managers report "98% occupied" using a definition that ignores the unit that's been empty for 4 months. Here's how to actually calculate it — and which version to use when.

The two formulas you actually need

Physical is the count of empty days. Economicis the dollars you didn't collect — and includes concessions, delinquencies, and below-market rents. Economic vacancy is almost always 2–4 points higher than physical, and it's the number that hits your bank account.

Worked example

Single-family rental, 365 days in the year.

• Market rent: $2,000/mo · GPR = $24,000
• Vacant 30 days during turnover → physical vacancy = 30 ÷ 365 = 8.2%
• 1 month rent concession to fill → −$2,000
• Tenant skipped last month → −$2,000
• Collected: $24,000 − $2,000 (vacant) − $2,000 (concession) − $2,000 (skip) = $18,000
• Economic vacancy = ($24,000 − $18,000) ÷ $24,000 = 25%

What vacancy rate should you underwrite to?

1. Stabilized single-family: 5–8% economic in most US markets.
2. Small multifamily (2–4 unit): 7–10% economic.
3. Class B/C apartments: 8–12% economic, depending on market.
4. Section 8: Often 3–5% — but factor in the longer initial vacancy waiting for HUD inspection.

Never underwrite below 5% on any deal. That's not optimism; that's leaving zero margin for one bad turnover.

The cost of one extra week of vacancy

On a $2,000/mo rental, every extra week empty costs ~$465. That's why filling at $50 below market in week 1 almost always beats holding for market through week 4. We cover the math in how to price rent.

How to reduce vacancy

• Start marketing the day notice is given, not the day the tenant moves out
• Pre-schedule turnover labor (paint, clean, locks) for the day after move-out
• Offer renewal incentives at month 10 of a 12-month lease, not month 12
• Track days-to-rent per listing — if it's > 21 days, your price is wrong