B Invested

What you need to know about rental vacancy rates before investing

When researching locations for a potential property purchase, an important piece of data to consider is the rental ‘vacancy rate’. This refers to the percentage of all rental properties in an area that are available to be rented. A vacancy rate is crucial because you could get the best deal possible on a purchase price, but if you go a long time without being able to find a tenant, the money you saved on buying will rapidly disappear.

Rate expectations

The real estate industry consensus places a healthy vacancy rate between 2-3%. The mark of 3% is considered a balance between investors and tenants, so it’s best to shoot for lower in order to tip the scales your way. If the rate is sitting above 3% in an area, you should think twice about investing there, especially if you are likely to rely on good cashflow.

Where are we at now?

A recent SQM Research report placed Australia’s official vacancy rate at 2%, which sounds good for investors. But as we have covered in recent articles, you don’t just invest in ‘Australia’, you’ve got to drill down to find a good rate in a neighbourhood, within a suburb, within a city, within a state.

For example, Sydney has a vacancy rate of 3.2% and Melbourne 4.4% as both cities continue to recover from COVID lockdown measures. For both cities, inner city apartment vacancy rates are far higher than established homes in affordable suburbs away from the CBD.

Higher vacancy rates for inner city suburbs are likely to continue this year due to ongoing restrictions on international and interstate workers and students, plus a shift towards remote working.

Meanwhile, the other Australian capitals have far tighter markets. Brisbane’s vacancy rate is 1.7%; Perth, Canberra and Darwin are 0.8%; Adelaide is 0.7% and Hobart is 0.6%. This data shows us that savvy investors might benefit from steering clear of Sydney and Melbourne and heading to a city where they can find a tight vacancy rate, in addition to below value properties with a decent upside. 

It’s not just now or never

When you’re looking at a vacancy rate now, you should also think about what it may become in the future. What is happening now that could change things down the track?

One thing to be aware of is development. Sydney and Melbourne were both undersupplied for inner city apartments at one point in time, but it’s certainly not the case now. Off-the-plan developments have been hitting the market in recent years as construction of projects is completed, giving tenants all the bargaining power.

If you bought an inner city apartment five years ago, you are suddenly competing for tenants with brand new apartments popping up everywhere. The more new properties that turn up, the lower they have to push asking rents in order to fill a lease. And therefore, the lower your rent goes too. So check out planned developments in the area as part of your due diligence. 

Play the percentages

Another important piece of data is the overall number of renters in a suburb. You can find this out from the ABS, or data providers like CoreLogic.

Generally speaking, you want the majority of residents of a suburb to be owner-occupiers, whether they are paying off a mortgage or own their home outright. Owner-occupiers look after suburbs better than renters and form communities that keep values stable or on the rise.

If around 20 to 25% of the adults in a suburb are renters, it means there are enough potential tenants to choose from, without too many other rental properties as competition, while the suburb holds its value. And when it comes to rental yields, the tighter the vacancies, in an affordable market, the better the returns will be.

I just called… to say

Data is useful, but should always be used as a guide, not a bible. There are many variables that can affect data. If you want to figure out what a suburb’s real vacancy rate is, it’s time to pick up the phone and canvas every local property manager to see how many properties they manage, how many of those are vacant, how long they usually take to find tenants and what the demand is like in the area.