Vacancy rate is the share of a rental's potential income lost to units sitting empty over a period, expressed as a percentage of the rent those units could have earned. It is the gap between the rent your property could collect at full occupancy and the rent it actually earned, and it belongs in every cash flow projection because empty units still carry the mortgage, insurance, and taxes.
In practice
There are two ways to count it. Physical vacancy looks at units and days: if you own a fourplex and one unit sits empty for two of twelve months, that single unit was vacant 2 of its 12 unit-months, and across the building you lost 2 of 48 total unit-months, a physical vacancy rate of roughly 4.2%.
Economic vacancy looks at dollars, which is what actually hits your bank account. Say each of the four units rents for $1,200, so the building's gross potential rent is $57,600 a year. The empty unit cost you two months of rent, or $2,400. Divide $2,400 by $57,600 and you get an economic vacancy rate of 4.2% as well. The two numbers diverge the moment you have concessions, a tenant paying below market, or unpaid rent: a unit that is physically occupied but not paying counts as economic vacancy even though no one would call it empty.
Why it matters to a small landlord
On one or two units, vacancy is lumpy rather than smooth. A single 30-day gap between tenants on a $1,500 unit is $1,500 gone, and that gap usually arrives with turnover costs stacked on top: cleaning, paint, a make-ready week. The way to keep it from surprising you is to budget a vacancy factor into every deal before you buy and to track the real number as you go, which is exactly what the monthly close is for. Most underwriting assumes 5% to 8% depending on the market; your job is to find out whether your actual number beats that assumption or quietly eats your margin. The biggest lever you control is shortening the gap between move-out and move-in, which is the heart of running a clean turnover.
Vacancy is one of the few line items that never shows up as an expense, which is why it hides. It surfaces instead in your effective gross income, the number left after vacancy and credit losses are subtracted from gross potential rent, and it flows straight through to cash flow. Watch the days a unit sits empty the same way you watch a turnover, because every one of them is rent you will never get back.