I’m constantly seeing both new and experienced investors make this underwriting mistake.

Many investors use a flat (let’s say 5%) vacancy rate for every property they analyze, regardless of the market, property class, or unit mix. Let’s talk about why this is a mistake…

Why vacancy matters so much: Vacancy equals lost revenue, and revenue changes drop straight to your net operating income. Get this wrong and your entire deal falls apart post-closing.

Most investors don’t realize vacancy rates should vary dramatically based on three critical factors:

Factor #1 Property Class & Market

A worn-down C-class property takes longer to renovate and lease than a pristine A-class building. C-class properties typically carry higher vacancy rates because tenant turnover involves more work and attracts a different resident base. Don’t use the same assumption for both.

Factor #2 Unit Mix

This is the big one most investors completely ignore.

Studios and one-bedrooms = higher vacancy 8%  due to transient residents. 

Three-bedroom units = lower vacancy 3 4%) because families and roommate situations stay longer.

The difference between using 5% across the board versus 8% for studios could mean thousands in lost revenue annually.

Factor #3 Management Quality

Be brutally honest about your management company’s efficiency. If they’re slow to turn units or you’re managing in-house without proper systems, increase your vacancy assumptions accordingly.

Average management company = higher vacancy rates in your underwriting.

Bottom line:

Stop using cookie-cutter vacancy rates. A studio-heavy C-class building managed by an average company might need 8 10% vacancy assumptions, while a B-class property with a larger average unit mix managed by an excellent PM might only need 3 4%.

Get this wrong and you’ll face cash flow surprises that can sink your investment.

P.S. – One percentage point in vacancy on a 50-unit property can mean $30,000+ in annual revenue. Worth getting right, don’t you think?