30 Nov Vacancy Rates: an important key driver of property investment
One of Sound Property’s favourite Key Investment Drivers for investment price growth and stable rental returns is the vacancy rate of a suburb. The vacancy rate for a given area at any one time is the measure of available or vacant rental dwellings, as a percentage of the total rental stock.
VACANCY RATES = Available rentals ÷ Total rental stock
What happens to my property if it is vacant?
One of the major fears for investors is that their investment may be empty, and not producing an income for a period. If a suburb has a low vacancy rate it usually means that there is not enough rental property available. This ensures an investment property will produce a constant source of rental income. In a market, excess demand and competition enables rents to be raised, increasing the rental yield on the investment. This in turn attracts new investors to the area and also encourages renters to become owner occupiers, both which add pressure to the available stock and tends to drive prices up. It is also interesting to review the trend of vacancy rates over a 6-12 month period to determine the direction of supply in a market and the amount of risk present.
Generally, a market is considered balanced at 3% and anything less is an undersupply. Conversely, anything over 3% is considered an oversupply and may have a negative impact on rental returns and prices. This was evident in mining markets like Gladstone, QLD which went from 1% vacancy during the mining boom to over 12% during the mining slow down. This in turn had a negative impact on prices.
Image 1, Vacancy rate trend in Gladstone before and after the mining boom showing the rental volatility of these types of markets and its impact on prices. Source: sqmresearch and PDSLive
How much vacancy should I budget for?
Using the formula below an investor can calculate for any loss of income due to vacancy by multiplying their weekly rent received by the numbers of week vacant per year.
SOUND TIP: 3% Vacancy Rate = 1.56 weeks per year vacant (52 x 3%)
A useful free website to research vacancy rates and other indicators in a suburb or postcode can be found at sqmresearch.com.au
Let us do the research for your suburb of interest! We will provide you with Vacancy Rates as well as another 14 Key Investment Drivers for growth and rental yield.
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This article is provided for general information only and does not constitute personal advice, as it does not take into consideration your personal circumstances. Please consult a licensed tax or financial advisor before making any decision to invest.