Eliminate Turnover . . . Here's How.

Be There . . . and Pay Up.

I’m a big believer that the key to being a successful owner of real estate is limiting turnover. Why turnover is enemy #1 to any real estate investor? Look at these numbers (they come from the average rental rate of around $1,250 for properties I own/manage):

• Vacancy loss of a few weeks, even in today’s hot landlord friendly market = $800
• Commission (I have a real day job in the rat race) to relet - half a months’ rent (or higher) = $625
• Repairs (although if you’re lucky, most or all of this comes out of the security deposit) = $300
• Make ready = $250

On average the way I see it, then, the grand total for a turnover costs me around $2,000.  Yours maybe more or less depending on where your units are and they type of properties.  Sure, if you can relet it quicker there is less vacancy loss. And if you lease it yourself you don’t have any commissions to pay. But you still have the hassle regardless: finding a new tenant, time spent, credit/background checks, travel to meet tenants, travel to repair the premises, etc. I’d prefer to avoid a $2,000 hit and a hassle.

Over the last three years I’m operating at a 76% renewal rate. 12% don’t renew. Another 12% is out of my control as they terminate early for reasons unrelated to my operation/management of the property (job loss, relocation, etc. - although I'd like to think I can control their lives). I’m betting these are pretty favorable numbers – but I can’t locate any industry standards to which I can compare to confirm this. But I do know that everytime a tenant renews its lease, it saves me $2,000. And hassle. Oh, the hassle.

So how do I keep my tenants in the properties? Keep them happy. And don’t be too quick to raise rent (yeah, I said it).

Be Johnny-On-The-Spot

Your rental units are your assets. Keep them in good shape – this serves multiple purposes: (1) keeps tenants happy with the place so they don’t want to leave; (2) keeps tenants happy so they tend to take better care of the place; (3) an ounce of prevention is worth a pound of cure – routine maintenance will save you multiples of that in expensive repairs or capital costs. I am quite sure it doesn’t shock you when tenants complain about how past landlords or their friend’s landlord never fixes things. Never calls back. And doesn’t care. You’d be surprised, but tenants appreciate it when you return their calls in prompt fashion when they have some issue. Admittedly, not all issues are yours to address (and to be sure, check your lease b/c you might not even realize which costs are the responsibility of the tenant), but a quick response is a key to showing the tenants you respect them and their concerns.

Care About Your Properties, and Don’t Be Afraid to Pay for Repairs

Take an inventory of your HVAC units, furnaces and hot water heaters. I’m betting you haven’t done this in quite a long time, but I bet some of them are quite old. Hot water heaters, for example, have an expected useful life of about 12 years depending on who you ask. So if your hot water heater is near or older than that, you better pay attention. Sure, you can save a few bucks every year by ignoring it, but when it fails, it’s a several thousand dollar repair to replace it and replace the flooring from the water damage. So do yourself a favor and have your plumber take a look at it and make any necessary repairs. For under $100 dollars every few years you’ll be glad you did. I also have my HVAC guy do an annual “18 point tune up” on the compressor and furnaces. Why 18 points? I actually just made that up, but it looks good in the form letter I send to the tenants telling them that I’m having their HVAC maintained. An efficient HVAC unit cuts down on their energy costs, and tenants like that. And they like me for it too. But, to be sure, I’m not all that concerned about their energy bill. Shocking, right?  But for $25 per unit (b/c my HVAC guy does it for all my rentals) I get a full tune up that alerts me to any problems that might have turned into a several thousand dollar capital expense. Pay $25 to save several thousand. Who doesn’t like that trade?

And just a quick note on small repairs. If your tenant calls you complaining about the door not shutting because of foundation movement, or a window that doesn’t quite shut well, or a leaky faucet . . . . for under $100 for just about all of those, you could have made your tenant happy (especially compared to most landlords that will ignore it) by taking care of it. And in the grand scheme of things, a few repairs of this nature over the course of the year isn’t going to move the profit needle all that much. But it goes a long way to keeping your tenant happy. And happy tenants renew their leases.

Don’t Raise Rent (unless you know you can!)

I know . . . I know . . . no one wants to hear this.  And quite a few readers will disagree with this paragraph.  Especially in this landlord friendly market. But unless you know your tenants want to renew, I suggest you don’t raise rent. But, you say, then my lease will be under market. And, you tell me, you won’t be keeping up with inflation. Well, believe that I hate packing my belongings and moving, and if I never have to do it again in my life it will still be too soon. But for many renters, an monthly $30 or $40 dollar increase or more makes a big difference. And they are more than willing to pack up and move to a different place to save several hundred a year. Especially tenants are living paycheck to paycheck. So compare the cost of a few hundred dollars extra in your pocket with the risk of losing a few thousand to turnover . . . you might think twice about this.  That's all I'm saying - think twice strategically about increasing rent on renewals.

If, however, you have a tenant who you know will remain in your unit, go ahead and bump rent . . . after all you are trying to make money. I have tenants who have put in their own gardens, or their own security system. Or they just had a baby and repainted (with my permission). Or they’ve indicated that they want to stay. In that case, you have information that gives you the comfort that you can raise rent without the risk of the tenant leaving. Do it.

In my mind, turnover can be controlled . . . more or less.

Follow me on Twitter: @RPivnick