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Jeremy Sheppard Blog post by Jeremy Sheppard

Why is Vacancy Rate more than just an indicator for Cash Flow?

Hi I’m Jeremy Shepherd. I’m talking about Vacancy Rate. Vacancy Rate is one of the indicators that we use at Empower Wealth to help our clients find good investment locations.

The first thing you think of about Vacancy Rate is cash flow. If you can’t survive for a couple of months with your property untenanted, you probably want to have a close look at Vacancy Rates.

The thing is Vacancy Rate doesn’t just stop at cash flow — it’s actually a very early indicator of the potential for capital growth.

Here’s how it works: it’s a lot easier to get a lease than it is to get a mortgage. It’s a lot cheaper too. So what this does mean? It means that tenants are far more agile than owner occupiers or investors.

Let’s say you’ve got a market suburb somewhere that’s undergoing some change — perhaps gentrification, perhaps there’s infrastructure and new schools, maybe it’s a commercial district opening up — whatever it is, this makes that location more attractive.

The first people that are going to capitalise on it are tenants because they’re more agile. What this does, is it drives down vacancy rates. This makes the location more appealing for investors. It’s also eventually going to appeal to owner occupies. It’s just that it takes them longer to get their act together. Owner-occupiers are humans to, right? Just like tenants.

So, eventually with the low vacancy rates, you get this interest from owner occupiers and from investors, and they push up prices. So low vacancy rates can be an early indicator of the potential for future capital growth.

The industry standard of a market imbalance is a vacancy rate of around about 3%.

As property investors, we’re obviously interested in lower vacancy rates, and we look typically at around 2% — and for a lot of our locations will be 1%, or even tighter than that.

But, you’ll find the Vacancy Rates can suffer from some volatility from time to time. By this, I mean that a vacancy rate could be 4% one month, and then down to 2% the next. This is particularly the case in thinly traded markets.

Let’s say, for example, you only have rental properties in a suburb. Now, if 2 of those are currently unoccupied, then the Vacancy Rate would be 2%. If another 2 come on the market, then you’ve got a Vacancy Rate of 4%. It’s doubled in just one month! And the next week they could all go, and you can have a 0% Vacancy Rate.

So it can suffer from tremendous volatility at times.

It’s important, therefore, you look at a historical chart to see where the Vacancy Rate has gone over the last 6 – 12 months.

This will give you a much better idea. You can also find some contradictory figures, depending on the data provider who provides the vacancy rate. So it’s important to look at a number of different sources and, of course, you can always contact the property manager in the suburb or various real estate agents to get a rough idea.

The Vacancy rate is just one of the indicators that we use and at Empower Wealth… there are plenty more!
If you’re interested in learning what these are, check out our Research page.

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