The vacancy rate will tell you the number of properties currently available for rent in that suburb, as a percentage of the overall number of rental properties. It is a quick and effective way to check the health of a suburb’s rental market. A low vacancy rate means very few properties are available for tenants, which translates into short or no vacancy time for landlords, and will often lead to rental increases. On the other hand a higher vacancy rate will lead to longer vacancy periods and lower rents, as there is more choice for tenants and less imperative to pay higher rents to secure a property.
What kind of vacancy rate should you look for? It’s generally accepted that 2% or below is a good figure to aim for; in essence, this means that your property will be vacant on average for 1 week or less a year, and leaves you little risk of extended vacancy periods if the property is presented and priced correctly for tenants. Does this mean you shouldn’t consider markets with a higher vacancy rate? Not necessarily. Like with all property data, vacancy rates need to be interrogated further.
The headline vacancy rate for a suburb will give you the total percentage of vacancies, without telling you the specifics in terms of property type, price point or location within the suburb. For suburbs with a wide spread of property types and rental prices, the vacancy rate can be misleading. For example, properties at the low end of the market may be having very little trouble renting, while those at the high-end sit for some time. We have recently bought a number of apartments in Bulimba for clients at the bottom end of the price point (mid-$300s), and have had very little difficulty renting these out, despite the suburb’s apparently dire vacancy rate of 4% - most of the available stock is at the higher-end, while entry-level property is relatively scarce.
Or perhaps there is a glut of apartments on the market in a suburb because of new development (these will always take some time to completely fill up) but very few houses available for rent. Hamilton, in Brisbane’s inner-east, is experiencing this situation; 177 of its 1336 rental properties are currently available to rent – but only 22 of these are houses and townhouses (which make up 38% of the suburb). The problem lies with apartments.
A simple check that I use to dig deeper into the vacancy rate of a suburb is to look at the number of properties available for rent in a suburb on realestate.com.au or domain, and segment it by property type and price. This will give you a more accurate indication of what is available and what will potentially be competing with your investment.
Overall, vacancy rates need to be considered in the context of your wider investment decision, so I don’t agree with hard and fast rules here. If the property makes a great investment in all other areas, but will have 2 weeks vacancy per year instead of 1, should you still consider it? Absolutely. Many of the best-performing suburbs in South-East Queensland have had high vacancy rates at times. You just need to factor this in to your returns. Also a suburb may have high vacancy rates now, but this may come down in the long-term due to limitations in future supply – which is why understanding future supply is so important!
Numbers that would genuinely alarm me are 5%+, particularly in areas with one predominant stock type. These kind of numbers are usually generated by areas with heavy development, and are best avoided anyway.