Why you must understand rental vacancy rates

savings-rates

By Steve Waters

Amongst the plethora of property data available these days are vacancy rates, which show the percentage of rental properties that are vacant at a particular period of time.

The thing is, average citywide vacancy rates aren’t really that useful because the sample size is too large.

What you must do is drill down to explore what is happening at the local rental market level.

Before we move on to understanding rental vacancy rates in more detail, investors must accept that they will experience moments of vacancy from time to time.

That’s because as a market strengthens, developers move in and build new product, which adds to supply – and is usually more supply than is needed.

What happens next is vacancy rates increase as this new supply comes online, however, it’s only a matter of time until the supply is absorbed and the market normalises. It’s just part of the cycle.

A barometer of the rental market 

Vacancy rates are the barometer of how well the rental market is doing.

That’s why it’s important to understand that data because a small percentage increase can have a bigger impact that you might think.

There is plenty of data out there on vacancy rates, which can be useful, but you must also drill down to suburb level.

In Sydney, for example, the rental vacancy rate is 2.2%, in Melbourne it’s 1.5% and in Brisbane it’s 2.8%, according to Domain, which are all under the equilibrium point of 3% where there is equal parts of rental demand and supply.

However, vacancy rates can and do vary widely on a suburb level.

To investigate the real vacancy rate in a suburb, we go to every single property manager in every office in an area and ask them how many properties they manage and how many are vacant. That research produces real-time suburb-level data rather than an average across a huge city like Sydney, which doesn’t really mean much.

You’re not buying into a city, you’re buying into a suburb, so you need to understand that suburb’s vacancy rate now and in the future.

What I mean by that is you must understand how many developments are on the horizon and what stage of construction they are up to.

At the end of the day, you need tenants to help you pay your mortgage so even though vacancies happen now and then, you want to limit how long any vacancy lasts.

Market fluctuations

The reality of property investment is that the market waxes and wanes so you must always keep a long-term view.

Part of that thinking is to create relationships with property managers in the areas where you own property so you can keep your finger on the pulse of the rental market, including real-time vacancy rates.

Inexperienced investors often panic during times of potential or actual vacancy.

The thing is a metropolitan property is usually only vacant for a long period of time because of one of two factors:

  • The landlord is too greedy.
  • The property is inferior.

Even if you have an oversupply, all you need to do is drop your rent and you will attract a tenant.

Some investors are almost delusional in their thinking and stubbornly hold out for a higher rent of, say, $10 a week but it may take them a month to secure a tenant and they lose far more than they would have gained.

On paper, the extra $10 helps serviceability to some degree, but from a hip pocket point of view it’s a bad financial decision at that point in time.

It’s a fact that the market will fluctuate throughout your property investment journey and you just have to ride out any ups and downs.

Yields will increase and decrease as rents and prices change over time. In Melbourne, for example, a 5% yield is great, but in Brisbane it’s not that great at all. When we were buying Sydney property just after the GFC, an 8% yield was achievable but today new investors would be happy with 3%.

The number one tip for investors when it comes to vacancy rates is they must research what the on-the-ground truth is by talking to multiple property managers.

Don’t abdicate responsibility. Investors must take responsibility for their portfolios.

Property investment involves hundreds of thousands of dollars so put the time in to ensure that your property or your portfolio is performing the best that it can.

Investors must also target their lease periods around the maximum demand times.

There must be some preplanning so that none of your leases are ending between October to February. That’s because trying to find a tenant in that period is horrendous. No one wants to move around Christmas.

You can therefore prevent unnecessary vacancy by ensuring your leases end during the peak periods of rental demand.

A final point is that investors can’t expect rents to rise every year. Rent increases happen in fits and bursts with periods of flat rental growth in-between.

Successful property investment is all about having real-time data as well as the right research and advice to ensure that you can hold your properties for the long-term.

Vacancy rates are a tool to help you achieve that goal, so remember that periods of vacancy are a fact of property investment that you should prepare for rather than be frightened of.

Posted on September 8, 2017 in Why you must understand rental vacancy rates

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