How The Absorption Rate Can Help Real Estate Investors

Learn how absorption rates can help you make better real estate investments!

Making accurate predictions about the real estate market is what every investor strives to do, however, it’s very tough to consistently achieve accuracy in an ever changing market. Real estate professionals have many measurable indicators that help increase accuracy when making predictions, such as neighborhood comps, surrounding development, inventory, employment opportunities, and more.

Calculating a variety of factors, numerous times can be unmanageable for some. Fortunately, there is one measurement in particular that is reliable and simple, known as the absorption rate.

What is the absorption rate?

The absorption rate measures the rate at which homes are sold in a specific market, during a certain period of time. It shows how quickly, or slowly, homes are being moved off the market and can help real estate professionals determine the viability of the market and if it’s a buyers or sellers market. It can also help sellers figure out the most competitive price for listing their properties.

How does the absorption rate work in real estate?

In order to implement the absorption rate into your investment strategy you must understand the calculation. The absorption rate calculation is very simple. You must divide the number of properties sold in a given period of time by the total number of active listings during that time period. For example, let’s say last month there were 3,000 properties for sale in Tampa, FL and 880 of those properties sold in that same month. The absorption rate would be 29%.

Written as an equation where PS = Properties Sold, LP = Listed Properties, and AR = Absorption Rate:

(PS/LP) * 100 = AR (%)

Industry professionals would say anything above 20% is considered a good absorption rate. This indicates a strong market for sellers as it means properties are being moved off the market rapidly. An absorption rate below 15% is considered to be slow, and therefore, a buyers market.

The formula for the absorption rate is flexible and can be customized to fit whatever location and time frame you’re looking for. It can also be used for different types of properties, such as multifamily rentals. To calculate the absorption rate for a multifamily rental unit you would find the total number of units, determine a time period, calculate the number of units rented during that time and then divide that number by the total number of units.

What is the significance of using absorption rates in real estate investing?

Although you will still want to calculate other measurable indicators prior to choosing an investment strategy, the absorption rate is a quick calculation to add to your arsenal. The more aspects of the market you can analyze, the better chance you have at achieving success with your investments. Absorption rates can be done at any point in your project and can give reliable predictions at a glance that help you navigate a dynamic real estate market.

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About CALCAP Lending

A division of CALCAP Advisors, CALCAP Lending benefits from the expertise of a seasoned team of professionals with extensive, successful track-records covering a variety of disciplines and leading large, nationally-recognized institutions. A private money direct lender, CALCAP Lending provides short to mid-term financing for property investors and businesses looking to purchase, refinance, renovate, and construct residential or commercial properties.

Lending FAQs

You've got questions, we've got answers.

What is private money lending?

Private money lending is a collateral-based lending strategy that is often associated with shorter terms and more attractive features. A private money loan offers more flexibility than a conventional mortgage or bank loan.

How does a private money loan work?

Private money lenders provide financing using money from private entities. Private money loans often work as bridges to help investors gather funds to achieve their short term real estate goals, but long term, permanent options may also provide.

Why would I choose a private money lender?

There are many advantages to using a private money lender for your real estate investments! Private money lenders can be more lenient when it comes to borrower credit issues, often there are no prepayment penalties, you can leverage your cash to buy multiple properties, and private money loans are quicker when compared with institutional loans.

Can I get prequalified for a loan?

CALCAP has a responsive loan team who are able to prequalify you. Contact a loan specialist at 833.816.5580 to get started.

How long does the lending process take?

Private money lending can be a quick and painless process. From start to finish, 30 days is common, however, turn around times can be as short as 10 business days.

Can I still be approved for a loan if I have bad credit?

Generally yes, we understand that people have temporary financial issues that come up, and we want to work with you to help you rise up financially to a better place. Offsets to credit concerns may include experience as a real estate investor, good cash reserves, and/or larger down payments.

I am a broker or investor, how can I work with CALCAP?

Business is built on relationships. Ours is no different. CALCAP Value and Preferred Partners receive exclusive rates and services. For more details and to submit your application, visit our partners page.

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