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We all know that during the long-term ownership of rental properties, you will experience vacancies, but how do you estimate or calculate the appropriate percentages or figures into your expenses? The answer is not simple and there is not one answer for all investments.

Let's start with residential 1-4 unit properties. First and foremost, you must determine what the specific area's vacancy rate is for this type of unit. This can be found at many resources including RE agents, NAR (National Association of Realtors) statistical data, & property managers. It is practically impossible to find out for sure what the vacancy rate has been over the last few years on the individual property you are looking at, as the owner can say anything they want. There is no way for you to prove otherwise. Therefore, you should use a combination of three factors. One is the average vacancy data collected from the sources listed above. Two, is to determine if the vacancy rates are declining or increasing in that area and adjust accordingly. Finally, you can adjust the final number you choose to use up a point or two based on investment style. If you are a very conservative investor, take the data figure you arrived at from methods 1 & 2 and add 2 points to it. Then plug in that number to arrive at your AGI (Adjusted Gross Income). This gives you a bit more of a cushion to allow for greater vacancy rates.

Occupancy rates (OR) for multifamily commercial buildings (apartments) are published by several sources as well and more accurate data is available. You can also discover the true actual OR for the specific property from the current rent roll. This figure can also be verified through a number of strategies. It is most important to calculate the value based on the current OR and not the seller's listed proforma. Never pay for upside potential!

The OR can dramatically change from state to state and from city to city, therefore it is most important to accumulate data from the specific area you are investing. Here is some current OR data for commercial multifamily in the US compiled by NAR: Ohio has the highest vacancy rate (VR) in the country at 12%, Michigan is second worst at 10%. Most markets today are sitting at 3-5%. Remember that taking state averages are not accurate enough and you need to get the city or even down to the community average VR.

Operating expense ratios are a big topic as well and here is my take on that. Using average ratios rather than average figures could end up getting you into trouble in your cash flow projections. The difference between the two is simple. Ratios or percentages can dramatically change depending on the investment vehicle, the OR, the rental income, the state, and many other factors. Using average figures rather than ratios will give you a more accurate result. To say that your operating expenses will be x% in all cases is simply not accurate enough. In addition, a commercial multi with a OR of only 75% will have a much higher EO ratio than a unit with an OR of 95%.

Multifamily is not the only commercial investments to consider when looking at vacancy rates. Here is some data on commercial office space in the US: The largest VR in the country is sitting at 20% and is estimated to increase due to the poor economic situation and the dried up lending market. For retail space, the highest vacancy rate in the US sits at 12.7%, also projected to increase dramatically due to the same factors. Apartment OR have actually been holding there own and due to the massive foreclosure rates and lack of residential loan programs, more and more families are forced to rent rather than own. This has had a positive effect on rental rates and OR for the commercial multifamily market and the rental rates are projected to iincrease again in 2009 due to these factors.

Will Barnard - Managing Partner of Nationwide Property Investments, LLC