Short answer: Start at 10 percent, and use 15 percent in a market that is new to you or soft. Then find the break point: the vacancy at which the house stops clearing your minimum return. In the round-number example below, a six-room house at $175 a week clears a 12 percent cash-on-cash return up to about 35 percent vacancy and still covers its mortgage until about 61 percent.
Where the vacancy comes from
A whole-house rental is either full or empty. A house rented by the room is almost never either. It has small gaps, room by room, all year.
Each room’s vacancy comes from two numbers:
- How long people stay.
- How many days the room sits empty before the next person moves in.
Empty days divided by the stay plus the empty days gives you the rate:
| People stay | Days to refill | Vacancy |
|---|---|---|
| 26 weeks | 7 days | 3.7% |
| 26 weeks | 14 days | 7.1% |
| 12 weeks | 7 days | 7.7% |
| 12 weeks | 14 days | 14.3% |
| 8 weeks | 14 days | 20.0% |
So 10 percent is not a law. It is roughly what you get when people stay about three months and a room takes a week or two to refill. If your rooms keep people for six months, you will beat it. If people leave after eight weeks, you will not.
A new house is different. It starts 100 percent empty and fills one room at a time. Budget for that separately, as a few months of mortgage and utilities with partial rent, and do not hide it inside the yearly rate.
What vacancy does to the deal
This is a round-number example to show the method. It is not a real property. A $200,000 house converted to six bedrooms, each sharing a bathroom and renting for $175 a week, 20 percent down at 7 percent, $72,000 cash in, and expenses at 40 percent of collected rent.
| Vacancy | Cash flow, per month | Cash-on-cash return | Debt coverage |
|---|---|---|---|
| 5% | $1,529 | 25.5% | 2.44 |
| 10% | $1,393 | 23.2% | 2.31 |
| 15% | $1,256 | 20.9% | 2.18 |
| 20% | $1,120 | 18.7% | 2.05 |
| 25% | $983 | 16.4% | 1.92 |
Every five points of vacancy costs this house about $137 a month.
Find the break point
Do not stop at “what vacancy should I use.” Ask how much vacancy the deal can take.
On this house:
- It clears a 12 percent cash-on-cash return up to about 35 percent vacancy.
- It keeps debt coverage above 1.25 up to about 51 percent vacancy.
- It still covers its mortgage until vacancy passes about 61 percent. That is more than half the rooms empty all year.
That gap is the real safety of the model. One empty room does not sink the month. But the gap between “pays the mortgage” and “worth my cash” is wide, and it is the second one you are buying.
Picking your number
- Look for evidence first. If rooms nearby are listed for weeks without filling, your number is higher than 10.
- Start at 10 percent. Use 15 in a market you have not rented in before.
- Run it at double. If the deal dies at 20 percent, it is too thin. Then run it again with the rent 20 percent lower, because rent and vacancy usually move together.
- Write down your break point next to the purchase price. If the house runs emptier than that for a quarter, you know it is time to change the rent, the listing, or the manager.
Put your own house through the rent-by-the-room calculator and change the vacancy line until a walk-away number fails. The reasoning behind those numbers is in rent by the room vs. whole house: the math.
Common questions
Is rent-by-the-room vacancy higher than a normal rental?
Usually, yes. Rooms turn over more often than whole houses, and each turnover leaves some empty days. That is why a whole-house vacancy rate of 5 percent is too low for a house rented by the room.
How do I turn length of stay into a vacancy rate?
Divide the empty days between renters by the stay plus the empty days. A room where people stay 12 weeks and it takes 14 days to refill is empty 14 out of 98 days, or 14.3 percent.
Does one empty room mean the house loses money?
Not usually. In a six-room house, one empty room is about 17 percent vacancy. In the example on this page the house still pays about $1,120 a month at 20 percent.
Education only, not financial, legal, or tax advice. Worked examples use round numbers to show the method and are not real properties unless they say so.