Metrocity Realty

Worried about vacancy?

What is the effect of vacancy on your investment return?

Many people "over-worry" about vacancy. But the prime concern for an investor is to obtain property in an area that rises in capital growth, and not worry about how good a bargain it is at the time of purchase.

For reassurance, check out the figures below, and also go to my Joan and Steve example (in BUYING).

Comparing vacancy rates
Overheated property market Booming property market Balanced property market
(supply outstrips demand) (demand outstrips supply) (supply meets demand)
5%-6% or more a year or 2% less a year or around 3%-4% a year or
2-3 weeks 1 week in year up to 2 weeks in year


VACANCY RATE TABLE

Yearly rent: $14,500
Yearly vacancy rate Yearly rent achieved Yearly rent reduction Yearly after-tax cost Monthly after-tax cost
2%
$14,210
$290
$152
$13
5%
$13,775  $725
$380
$32
10%
$13,050  $1,450
$761
$63
20%
$11,600
$2,900
$1,522
$127
25%
$10,875
$3,625
$1,903
$159

The short-term funding costs for a property that's vacant for a long time are something to be concerned about, but also to be planned for, with a cash buffer of about $5,000.

Negative gearing occurs when the costs of your investment are more than the income you receive. This shortfall attracts a tax-break at your marginal tax rate.

So, factoring in everything over a 12-month period, a long vacancy isn't as bad as you may first think.

It is stressful, not having a tenant for five or six weeks. However, the table, above, shows that the REAL cost in dollar terms is a lot less painful. Even temporarily dropping the rent to get a tenant does not impact too negatively, provided you are not over-extended.