Vacancy Rate
The percentage of available rental units or space that is unoccupied at a given time. In the income approach, a market-derived vacancy rate is deducted from potential gross income to estimate effective gross income.
Vacancy rates vary by property type, location, and market conditions. A healthy residential rental market typically has vacancy rates of 3-7%. Very low vacancy rates (under 2%) may indicate upward rent pressure, while high vacancy rates (over 10%) may indicate oversupply or declining demand. The appraiser should use market-derived vacancy rates from comparable rental properties rather than the subject's actual vacancy history, which may not be representative. Vacancy is combined with collection loss (rent owed but not received) as a single deduction from potential gross income.
Related Terms
Effective Gross Income (EGI)
EGIPotential gross income minus vacancy and collection losses, plus other income (laundry, parking, late fees).
Net Operating Income (NOI)
NOIThe annual income remaining after deducting all operating expenses from effective gross income, but before deducting debt service (mortgage payments) and income taxes.
Income Approach
A valuation method that estimates a property's value based on the income it generates or is expected to generate.
Market Rent
The rental income a property would most likely command on the open market, based on analysis of comparable rental properties in the area.
More in Income Approach
View allCapitalization Rate (Cap Rate)
Cap RateThe ratio of a property's net operating income to its market value or sale price, expressed as a percentage.
Gross Rent Multiplier (GRM)
GRMThe ratio of a property's sale price to its gross monthly (or annual) rental income.
Discounted Cash Flow Analysis (DCF)
DCFA yield capitalization technique that estimates property value by projecting future cash flows (income minus expenses) over a holding period and discounting them to present value using a market-derived discount rate..
Operating Expenses
The recurring costs of owning and operating an income-producing property, including property taxes, insurance, management, maintenance, utilities, and reserves for replacement.