How Vacancy Changes Rental Property ROI

Why vacancy gets left out

It's tempting to budget a rental assuming it's rented 100% of the time — especially with a good tenant currently in place. But every rental eventually turns over: a lease ends, a tenant moves, and there's a gap before the next one moves in. Budgeting 0% vacancy isn't optimism, it's an assumption that will eventually be wrong.

The same property at different vacancy rates

A $200,000 rental, 20% down, 6.5% rate, renting for $1,900/month:

• 0% vacancy: $247/month cash flow, Cash-on-Cash Return of 7.4%.
• 5% vacancy (about 18 days/year — a typical assumption): $152/month, Cash-on-Cash Return of 4.6%.
• 8% vacancy (about a month/year): $95/month, Cash-on-Cash Return of 2.8%.
• 12% vacancy (about 6 weeks/year — realistic for a higher-turnover market or property type): $19/month, Cash-on-Cash Return of 0.6%.

Moving from a 0% assumption to a realistic 5-8% cuts this property's return by more than half. That's not a rare, unlucky scenario — it's what actually happens to almost every rental over a multi-year hold.

What vacancy rate to actually budget

Base it on the specific property and market, not a generic default: check typical time-on-market for rentals in that area and property type, factor in how long the current tenant has been in place (a long-term tenant reduces near-term turnover risk but doesn't eliminate it), and lean toward the higher end of a reasonable range for higher-turnover property types like short-term or student rentals.

Why this matters more than it looks like it should

Vacancy doesn't just reduce income during the vacant period — it compounds with every other fixed cost (mortgage, taxes, insurance) that keeps accruing whether or not the unit is occupied. On a property with thin margins to begin with, a vacancy assumption that's a few points too optimistic can be the difference between a deal that cash flows and one that doesn't.

Test different vacancy assumptions for a specific property on the Rental Property Calculator, or use Stress-Test mode to see the deal under a combined downturn scenario.