Guide
Rental vacancy underwriting
Team RE Underwrite Lab
Vacancy is uncollected rent
A vacancy allowance is the rent you do not expect to collect, written as a percent of gross rent. It covers empty months and, if you want it to, unpaid rent. It is not an expense like insurance. It never arrives, so it should come out before you subtract bills.
RE Underwrite Lab does not survey a city's vacancy. You type the percent. The long-term rental calculator applies one inside its sample. This guide uses a different rent and a different percent.
Formula
Gross annual rent = monthly rent × 12. Lost rent = gross annual rent × vacancy percent. Effective annual rent = gross annual rent − lost rent.
Cap rate and cash flow still need expenses and, for cash flow, a loan. Effective rent is only the top of that stack. The 1% rule ignores vacancy entirely.
Example
Illustrative example. Monthly rent of $1,650 is $19,800 a year. An 8% vacancy allowance removes $1,584. Effective annual rent is $18,216. These figures are made up so the percent has something to multiply. They are not a lease and not a market report.
Expenses are not subtracted yet. If taxes, insurance, and repairs are $7,400, the income left before a loan would be $10,816. That second number is only here to show that vacancy comes off first. It is not a full underwriting.
Common pitfalls
Applying vacancy after expenses, or not at all, leaves the gross rent in the NOI. Empty months then show up as if they paid the taxes.
Copying a percent from a different city, or from a building with a waiting list, makes the allowance a story. The calculator will accept it anyway. The page cannot tell a story from a lease.
Steps
Turn monthly rent into a year
Gross rent is the monthly rent you believe you can collect, times twelve.
Apply a vacancy percent
Lost rent is gross rent times that percent. The percent is yours. This page does not publish a market vacancy rate.
Subtract
Effective rent is gross rent minus lost rent. Expenses and the loan come off after that, on the rental calculator.
Questions
Is 8% the vacancy I should use?
No. Eight percent makes the sample arithmetic easy to check. A leased house and a vacant house are different inputs.
Does vacancy include concessions?
Only if you put them in the percent or reduce the rent first. A free month that is not in the percent is still lost rent.
How does this differ from the short-term occupancy sketch?
Short-term revenue counts booked nights. This page counts a percent of annual lease rent. Do not paste one into the other.
Should I vacancy-adjust the 1% rule?
The 1% page does not. If you want uncollected rent out of the screen, reduce the monthly rent before you type it, and know you have changed the screen.
Where do bad debts sit?
In this formula they sit inside the vacancy percent if you choose to include them. There is no separate collection line.
Example only. Not financial, investment, legal, tax, lending, or appraisal advice.
Estimates only. Not financial, legal, tax, or investment advice. RE Underwrite Lab calculators and PDF reports provide educational estimates based on the numbers you enter. Actual purchase costs, rents, expenses, financing terms, taxes, insurance, vacancy, rehab costs, refinance eligibility, and returns vary by property, market, lender, and local law (including short-term rental rules). We do not guarantee any outcome, profit, cash flow, or appraisal. Some content and tools may be generated or assisted by artificial intelligence and can contain errors. Always verify assumptions with licensed professionals and your own due diligence before making decisions.