Managing Residential Income Property: One Simple Bit Of Timing Can Make A World Of Difference

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Having been born and raised in SoCal, doing business there for over three decades, many of the lessons learned in nearly a decade workin’ in other states has been instructive — an understatement if ever there was one. I’ll bet if you’re invested in a midwestern state, the thought of a last quarter vacancy freezes you in your tracks, pun intended. A November vacancy in San Diego is irritating, even a tad worrisome, but it gets filled. Instead of happening in a couple days or weeks, it might be a month. That’s an eternity around these parts. Yet that’s relatively overnight compared to dealing with having to rent up a unit in chillier climes, especially when it’s cold, wet, and holiday season. However, if escrow is closing on your latest acquisition in the winter, or you find yourself taking over units with leases rolling over then, what to do?

As usual — it’s all about planning.

It varies a little from market to market for local reasons, but there’s always a range of months when having leases roll over is preferred. Yeah, I know, Duh. Still, when closing on vacant units this time of year, or when taking over leases expiring now, it’s easy enough to eliminate the problem. Simply give new tenants or tell existing tenants they have a choice. They can sign say, a six month lease, or an 18 month lease. Either way you’ve eliminated the problem. The lease(s) will be timed to expire within the prime leasing season. But what if you own a couple dozen doors or more, maybe a lot more?

Do what builders and developers have been doin’ forever. Understand your market’s absorption rate. That is, the rate at which it can absorb vacant units — how many at a time? How many units can you or your management firm lease in 30 days? Is it a different figure just one neighborhood over? Maybe, maybe not. It’s almost a matter of sanity maintenance, isn’t it? Even if you’re in a market in which everything rents overnight with a 3 X 5 card on the front yard tree, having to mess with 10 new vacancies simultaneously isn’t any less of a pain. I know, cuz I’ve seen me do it.

Many members here talk about how they’ve learned to specialize in various markets for their long term investments. Using this method of staggering rollover times is, for most, a practical matter of self defense. By spreading out a buncha leases over six months, you’ve created for yourself an orderly process in which you haven’t antagonized the local absorption rate. This also aids tremendously, your ability to plan various work projects around vacant units. Gettin’ work done in the winter in potentially extreme weather is to be avoided when possible. By ensuring your vacancies will pop up during the prime rental season, and during reasonably decent weather, you’ve gone a long way towards eliminating logistical pains in the keister, not to mention your bank account. Also (Captain Obvious alert!!), by scheduling any vacancies for the best renting season, you’ve also virtually guaranteed yourself a far greater slice of the tenant pie. You think you don’t want dead of winter vacancies? Tenants aren’t exactly out in droves, lookin’ for their next place right after finishing their second piece of pumpkin pie.

Now’s the perfect time to address this problem. Give your tenants notice that rollover time will mean a shorter or longer term lease. You’ll quickly find out that for the most part, they’ll be grateful for the change.

Photo: Darryl

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About Author

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.

11 Comments

  1. I never thought of that, but can see how with only the 4 I have it would be a nightmare trying to fill al out once and that’s not considering the absorption rate, just the logistics of it.

    Great post!

  2. Good post here. A couple of comments to add on this topic. First, when you are telling rollover tenants that you will be having the lease be a duration that differs from before, also tell them that this is a one-time event if you do annual leases. Second, I usually do this with the very first lease, when the tenant is new; I explain it in a couple of ways depending on circumstances; one way is “it’s a trial period lease, to see if it works for you and for me”; the other is “I try to keep lease ending date close to school year ending date”. Sometimes how you present this sort of stuff is important to not raising suspicions of ulterior motives (i.e. landlord just wants to jack up the rent more often).

    • Jeff Brown

      A superlative observation, Steve. I shoulda mentioned how I used to do it.

      Trying to kill two birds with one stone, I told them that I was doing it for my own benefit and convenience, but that it would also benefit them. Tenants don’t like lookin’ for a place to live in bad weather or during the holiday season any more than we like goin’ vacant a few months. But I also took the opportunity to offer them a choice between the long and short lease terms. I told them if they opted for the longer period, I’d pay their first six months of cable tv. You’d be surprised at how often the light in their eyes would brighten. :)

  3. When we had apartments we had several units go vacant every year around the end of November and then would not get filled until February of the next year. It was almost as if they went home to visit family and came back after the holidays. The people renting in February were not the same ones that had moved out, but that was the feeling that came across. With MHPs we have not had the same experience. there is a whole lot less turnover than with 1-bedroom apartment units.

  4. Hi Jeff:

    Another thing we’ve added to our contracts that seems to stagger ending lease periods is allowing them to find their own replacements, without penalty, if they break their lease early. This clause makes tenants sigh with relief and has really made the ending time frame somewhat irrelevant – for them and for us. We have been absolutely amazed at the number of tenants who ignore the contract dates and find their own replacements (which includes having the place ready for that next tenant to move in).

    The tenant sees this as a real benefit for themselves (which it is) and we see it as a tremendous benefit for us (which it is!).

    Here’s to no vacancies!

    • Jeff Brown

      Hey Karen — I’ve known a couple people who’ve done this with some success. They included the caveat that they had last word on qualification. I’ve always like the idea.

  5. Karen,
    Can you give a little more detail on how you run your program with replacements. Is that with all tenants or just of they want to break the lease?

  6. thanks jeff. i have out-of-state properties. not sure what 6 mos of cable would cost. i have a vacancy now. am considering offering 12mos rent at full price and 18 mos at reduced $100.00/mo rent. would get me a longer term tenant, end of lease in the spring, and a shorter vacancy.. your thoughts??

  7. Jeff Brown

    Hey Al — Think long term. If that approach works, it’ll likely be a one time thing. Look at several ways to get it done, then calculate the ultimate cost for each. You’ll learn that many are roughly the same, and some are surprisingly costly, just not at first glance.

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