Model annual vacancy loss, effective gross income, and turnover costs
Vacancy loss is the income you forgo when units sit empty between tenants. The national average is roughly 5–7%, but this varies widely by market. College towns might see 2–3% while struggling markets can run 10%+.
Turnover costs are the hidden expense most new investors underestimate. Each turnover typically involves cleaning ($200–500), touch-up paint and repairs ($500–1,500), marketing and showing time, and lost rent during the vacancy period. A single turnover can easily cost $2,000–4,000 all-in.
The best way to reduce vacancy loss is tenant retention. Responsive maintenance, fair rent increases, and good communication keep good tenants in place. It's almost always cheaper to keep a current tenant than to find a new one.
When underwriting a deal, always budget for vacancy even if the property is currently 100% occupied. Conservative investors use 8–10% to build in a margin of safety.