Follow Us on Social Media

email icon rss icon linked.in icon google plus icon twitter icon facebook icon

Tenant Turnover: The Biggest Killer of Your Rental Cash Flow

by Kevin Perk on September 23, 2013 · 44 comments

  

I have said it before and I will say it again, positive cash flow is king in the landlording business.  My goal as a buy and hold investor is to try and maximize my cash flow.  Over the years I have learned that there is one item that kills cash flow more than any other:

Tenant Turnover

When talking about tenant turnover killing cashflow, I am talking about all of the processes and costs involved in moving a tenant out of an apartment, fixing it up and moving another tenant in it.  These processes and costs include:

  • Administrative costs – The time and effort it takes to process tenants out and process new ones in.
  • Advertising costs – Depending on your market, you may need to run print and web based classified ads, put up signs, hold open houses, etc.
  • Showing Costs – Someone generally has to field the phone calls, set showing appointments, drive to the property and show it to potential tenants.
  • Application costs – You have to run credit and criminal background checks, verify work and income information and process the application.
  • Repair costs – Could be a biggie.  Ideally you would be able to immediately re-rent the unit.  But that rarely happens.  There is always some amount of repair costs.
  • Lost income costs – Of course when your apartment is vacant, it is not generating any cashflow at all, much less a positive cashflow!

Avoiding Tenant Turnover

All of these costs can add up quickly.  So what can you do to keep tenant turnover as low as possible?

  1. Avoid yearly jumpers – Some folks, for what ever reason, just like to move around a lot.  They will change addresses every year or so and you can see this on their application.  If you can, try to avoid these folks.  You really want people who will stay long term.
  2. Respond to tenant requests – Probably the number one complaint of tenants is unresponsiveness of the landlord to their requests, especially repair requests.  To keep good tenants long term, you have to be responsive and communicate with them.  You have to do your best to fix things.
  3. Maintain your properties – Very few people are looking to rent from a slumlord.  Keeping your grass cut and the common areas clean are part of the business.  Don’t skimp here.
  4. Keep rents well within the market – Some would say that you need to raise rents every year.  I would argue that you may not be making what you think with rent increases if they cause your tenants to move.

There is not really much you can do if your tenant is determined to or has to move due to life circumstances.  At that point, another whole process comes into play in order to get your property back as close to rent ready condition as possible.  But that is a subject for another post.  For now, use these tips to keep your turnover as low as possible.

Photo:

Email *
  



{ 44 comments… read them below or add one }

Karen September 23, 2013 at 12:00 pm

Great post, Kevin. Does this come into property selection for you too? I was just considering college students as a target market, but of course that short-term housing. It seems single family homes may have longer tenant occupancy than apartments, but it depends…

Thanks for the tips! Turnover kills cashflow… turnover kills cashflow….

Reply

Kevin Perk September 23, 2013 at 10:20 pm

Karen,

Yes, your market will in some ways determine this. I, for example, am generally in a market that caters to 20 somethings. They are in the stage of their lives where there are a lot of transitions – jobs, marriages, kids, etc. So I can get a good amount of turnover sometimes. But, they are very good tenants and generally treat the properties well.

The college student market will have a ton of turnover. Plus, if I were you I would budget high for rehab and repairs. Some will be good tenants, but some are going to have toga parties as well.

Good luck and thanks for reading,

Kevin

Reply

Jessica Sala-Bonin September 23, 2013 at 4:43 pm

Totally agree with this! I think the best way to avoid turnover is to thoroughly screen your tenants and be a great landlord!

Reply

Kevin Perk September 23, 2013 at 10:27 pm

Jessica,

Thanks for reading and commenting,

Kevin

Reply

lamac66 September 23, 2013 at 7:11 pm

Outstanding advice. Screening is the key.

Reply

Kevin Perk September 23, 2013 at 10:26 pm

Iamac66,

Screening is a big part of it.

Thanks for reading and commenting,

Kevin

Reply

Sri September 23, 2013 at 7:50 pm

I totally agree. I actually purchased an income property where the tenants were paying about 22% below market value rents. I chose not to change the rents after purchase and keep it that way since the tenants had been there for over 5 years each. THe bottom line is how much do you value the extra 200-300 USD per month (i.e. $3600 a year) in income vs. having happy long term tenants. For me even an extra 5k a year is not worth the effort. I would keep rents low until the tenant moves out due to other reasons.

Reply

Kevin Perk September 23, 2013 at 10:30 pm

Sri,

Yep, sometimes it is better to let sleeping dogs lie so to speak. You might make a little more on the front end, but after 5 + years, if they move out I would bet you would have some serious rehab to do. Smart move on your part to wait until they move on their own. But I also would not let rents get too low under market. Tenants know to expect some rent increase every once in a while.

Thanks for reading and commenting,

Kevin

Reply

brigida gimbel September 23, 2013 at 9:19 pm

Great post, Kevin! I think that landlords not responding to their tenants’ complaints and requests is the most annoying factor. Landlords do have a responsibility, after all, to make sure that the complaints received are sorted out quickly, ensuring the longer stay of the tenant.

Reply

Kevin Perk September 23, 2013 at 10:34 pm

Brigida,

I could not agree more. It can be hard to respond promptly to all requests but you have to make the effort. Tenants can be really understanding as long as they know you are making an effort.

Thanks for reading and commenting,

Kevin

Reply

Geoff Murphy September 24, 2013 at 6:02 am

Great Article Kevin. It’s literally managing of tenants 24/7! One thing I have noticed in my short tenure as a landlord is that if the tenant senses any weak points, they will try to exploit it. People tend to forget this is a business.

Geoff

Reply

laurice September 24, 2013 at 8:29 am

Asolutely! Some tenants can pick up on if a lanlors is a busines or mom and pop and will try to test accordingly.

Reply

Kevin Perk September 24, 2013 at 10:44 pm

Laurice,

Good point. Tenants are not dumb. If you do not run your business as a business, they will not treat it as a business.

Thanks for helping out and for reading,

Kevin

Reply

Kevin Perk September 24, 2013 at 10:50 pm

Geoff,

Yes. We as landlords have to be very professional and business like. That means being friendly but firm, especially when it comes to rules and policies. Not always easy to do, but like the old saying goes “give an inch and they take a mile.”

Thanks for reading and commenting,

Kevin

Reply

Seth Williams September 24, 2013 at 6:37 am

Great insights here Kevin. On one hand these seem like obvious truths, but I definitely needed the reminders.

Reply

Kevin Perk September 24, 2013 at 10:45 pm

Seth,

All of us can use a reminder once in a while.

Glad you enjoyed it and thanks for writing,

Kevin

Reply

Susan Cain September 24, 2013 at 4:13 pm

My experience is unusual. I have luxury condos in Boston, have always hired the same Realtor to find tenants (Tenant pays fee) and they are thoroughly checked out.My tenants tend to stay a long time. Over the years I have often kept a good tenant at a lower than market rent.Better than risking a vacancy. My tenants average six years. I also have a Studio next door to Mass. Gen. Hosp. Those tenants are Drs., who stay two or three years. Generally, before they leave they send an email to incoming Residents, telling them of the great apt. with the terrific landlady. Since I live in FL I have a general contractor and an HVAC company on speed dial. And, of course, the management company will always check something out and fix toilet problems, if necessary. I’m very big on maintenance, and I have a reputation for paying my bills quickly. With no mortgages, my cashflow is very good. Thirty years ago, with 14% mortgages, I lost money every single month. (Good thing I had a day job.)When rents rose, I paid them off, and used the extra money to regularly upgrade everything. Since I believed in the old adage, “Location, location, location” I have realized tremendous appreciation.

Reply

Kevin Perk September 24, 2013 at 10:57 pm

Susan,

Great job! You know your market. You respond to your tenants, keep your places nice and know when you have a good thing.

You made it through 14% interest rates! I think we could learn a thing or two from you. :)

I am curious about one thing. You say you own condos. Have you ever been hit with an unexpected assessment that killed your cashflow? If so, care to share that story? This has always made me leery of condos.

Thanks for reading and writing,

Kevin

Reply

Susan Cain September 25, 2013 at 7:53 pm

Since one of my condos is a loft conversion in a 100 yr old building, I’ve been hit with two big assessments. The first, I paid off in one payment – which affected my bottom line. The second I am paying off monthly over 10 years. This doesn’t significantly impact my cashflow. But, with old buildings, the expenses can mount up. I just paid $10,000 (cash) for new sliding doors and windows in my studio apt. I expect to break even this year. But beginning next year, I will raise the rent and make up the loss. Sometimes you have to look at the big picture.

Reply

Kevin Perk September 25, 2013 at 9:06 pm

Susan,

Thanks for the response.

I have several century old buildings myself, so I understand where you are coming from.

I agree, you have to look at the big picture. But those assessments must hurt. Those of you out there thinking of buying condos for investments, understand what assessments are and how they can be assessed.

Kevin

Mary September 28, 2013 at 4:12 pm

This is good info.

Reply

Kevin Perk September 30, 2013 at 10:57 pm

Thanks Mary!

Reply

Dan September 24, 2013 at 7:54 pm

Great post…thanks. I learned this this lesson the hard way. This is great information now that I want to try to buy more rentals.

Reply

Kevin Perk September 24, 2013 at 10:47 pm

Dan,

I think I learned this the hard way too. We all have had those lessons. Hopefully I can help someone else not learn it the hard way like we did. :)

Thanks for reading, commenting and the kind words,

Kevin

Reply

Tivon Johnson September 26, 2013 at 11:33 am

This is a great article and I love all of the feedback! I am currently planning to relocate from Atlanta to the DC Metro area next month. I recently graduated with a degree in accounting and will focus the next year on passing the CPA exam. However, I also plan to get into the condo rental business within the next few years. I have pretty good credit and my plan is to take out a mortgage for a condo and live in it for a few years before renting it out and purchasing another. Is this a good way to get started? Can you offer some advice on how I can to get started? Thanks!

Tivon

Reply

Kevin Perk September 26, 2013 at 10:38 pm

Tivon,

Could be. Why not buy a duplex or fourplex and live in one unit and rent out the others? That is how I go started. And coming from the DC area, I know there are plenty of duplexes and such up there.

Whatever you do, make sure the numbers work. Remember that cashflow is king! Keep some reserves as well.

There is tons more advice on the BP site. Poke around a little. Ask questions on the forums. If I can help any more, let me know.

Thanks for reading and commenting and best of luck to you,

Kevin

Reply

Tivon Johnson September 27, 2013 at 5:23 am

Kevin,

Getting a duplex was my initial plan and how I really would like to get started but it seems they are so expensive in DC. Especially compared to Atlanta. I’m not sure if I would qualify for a mortgage on a lot of these properties or have enough for a down payment. But I’ve been reading up on some real estate financing methods. I just need to figure out the best route for me. Thanks!

Tivon

Reply

Kevin Perk September 27, 2013 at 10:32 pm

Perhaps a fourplex then? Better potential cashflow than a duplex, plus you can still get conventional financing if you live in one of the units.

I know DC is high. Lots of tax dollars streaming through that economy up there driving prices up.

Take some time and get to know the area before you buy. You will be better able to spot a deal that way. Be patient, they do come along.

Good luck, and if I can help, just ask,

Kevin

Mike September 26, 2013 at 2:29 pm

I agree with not raising the rent. If you have a good tenant, that fact is paying off already, so why risk losing them for a little more rent.
A tenant after a year told me she was having financial difficulties and sadly had to move out. I asked if $100 less/mth would help and she said yes and ended up staying another year. Since I know a vacancy will usually cost me at least a months rent I figure I about broke even, but I didn’t incur the other expenses that go along with turnover, and kept a quiet, gentle tenant for another year.

Reply

Kevin Perk September 26, 2013 at 10:41 pm

Mike,

Good for you. That was a smart idea. We have also worked with good tenants who have fallen on hard times. There can be just so much involved in re-renting a place that it just makes sense to keep someone in there, even for a little less. One has to look at the big picture sometimes and not count every little penny.

Thanks for sharing and reading my post,

Kevin

Reply

Gary Parker September 27, 2013 at 12:00 am

Great article Kevin. I always go for two year leases and tell tenant up front I am looking for long term and that I dont raise rent as long as they are there unless my costs go up such as water or taxes. I do have very tight leases that hopefully allow me to terminate the lease if I need to. However, as stated, one of the most important things is to respond quickly to reasonable needs. I will show just a slight bit of weakness to keep the tenants thinking they are somewhat in charge; however, on time rent, yard care and so on I am brutal about. I tell them up front and make them initial it in the lease. I rather scare them off up front than deal with it later.

Reply

Kevin Perk September 27, 2013 at 10:38 pm

Gary,

” I rather scare them off up front than deal with it later.” Yep! Me too. Long term leases are a nice thing also.

Agree with your other points as well. We just raised many rents here. Why? Both the city and county raised their tax rates. Not my fault tenants, blame your legislators. I can’t absorb all of that.

Thanks for reading, writing and for the kind words,

Kevin

Reply

Shaun September 30, 2013 at 3:00 pm

I assume that you are still at or below market rents with the increase?

Tenants don’t care (nor should they care) if your expenses go up if the new rent is out of line with the market. If you have been giving them a break with below market rent and decide to raise the rents for this reason but it isn’t costing them more than moving no harm no foul.

Reply

Kevin Perk September 30, 2013 at 11:03 pm

Shaun,

I hear what you are saying. Our rents are pretty close to market. I like to keep a close eye on what the market will take. Usually we will increase the rent on the new tenants moving in. But when there is an increase due to an increase in government related expenses, I like to let them know that the rent increase is their elected representatives fault.

Thanks for reading and commenting,

Kevin

Shaun October 1, 2013 at 7:53 am

Oh I agree that it is fine to point out that expenses are going up and pointing out that the wonderful elected officials are a big part of it.
It just can’t be the sole reason to do an increase.

For example I have a very good resident that has been with me for over 4 years. I have never increased her rent. I am probably going to do it sometime in the next few months (Trying to decide if I do it at the end of the year or not. She will probably not want to move then so it might go over easier but if she DOES move I will be screwed as I may have a couple months vacancy).
One reason I am doing it is that my taxes, insurance and other fees and expenses have all gone up. But that has been true every year. The big difference in the last year is that market rents have also upticked. In the past if I had raised her rent I would have made it a premium and she may have left and it would have been unlikely to get any more than she was paying. Now she is a good $100 less than comparable places so asking for a $50 increase is still a good deal for her.

Frank O September 27, 2013 at 3:32 pm

Good read. As of yet, I’m not buying or holding but I could use this as a resource and check list in order to know what to look out for when I do.

Reply

Kevin Perk September 27, 2013 at 10:39 pm

Frank,

Thanks! Lots of other checklists on this site as well. Let us know when you get your first deal we will be glad to help.

Kevin

Reply

Tia September 28, 2013 at 1:54 am

Great post. I totally agree with the raising of rents. My mother has lived in the same apartment for 12 years. Her property has gone through many owners and management companies during that time. Each raising the price a little. However this last owner is raising rents to match the apartments around this property. The prices are comprable to the new properties closest to them. However the property doesn’t have the same amenities nor is it up to the same standard as the others. New rents go into effect soon, and people are slowing tricking out of the property. My mother is on that list as well. I hope the owner accounted for this big of a vacancy rate

Reply

Kevin Perk September 29, 2013 at 8:18 pm

Tia,

Thanks for the great comment. Some folks just don’t see the big picture. I hope they accounted for those vacancies as well.

Thanks for reading and the kind words,

Kevin

Reply

Lora October 24, 2013 at 6:31 am

When you are a landowner you should know all these useful tips how to ask your would-be tenants about their leisure, hobbies, friends and so on. These questions can help you to anticipate the tenant’s behavior and know how he is planning to spend time in the apartment. If he is working all day long and needs a rest in the evenings, or if he is a partygoer and has lots of friends to destroy your house. Communication can be the key point to success.

Reply

Kevin Perk October 24, 2013 at 10:25 pm

Lora,

Good point. You pick up a lot by just talking with and observing your potential tenants.

Thanks for reading and commenting,

Kevin

Reply

Danny December 17, 2013 at 3:53 pm

Hi Kevin,
Great Points there! I have to say that the items listed will vary depending on individual market/ Part of the Country. I can only speak from my experience renting apartments in Boston

Admin Cost might apply. I was a rental agent in Boston and know for sure that Tenant Turnover is a given. Sept 1st is the busiest day as everyone is moving . Boston is a transient city so always having people coming and for school, work, job transfers, etc. Most rents go up $50 a year so the turnover is good for the LL as there is always someone willing to pay that higher rent.
As For advertising, showing and Application costs, majority of LL outsource those functions to Realtors who get paid fees by the tenants. The prospective Tenants also pre-pay for their own Application fees, so nada out of pocket from the LL pocket.
Repair Cost will also be there in any income producing real estate asset. Lost Income is very minimal due to the nature of the market here in Boston, Very strong demand, and the move in fees are hefty usually 1st, last and a realtor fee, and maybe deposit.

Reply

Kevin Perk December 17, 2013 at 4:28 pm

Danny,

Thanks for sharing what is going on and how things work in the Boston market. Everything in the real estate business is going to vary, even if only a little, because of the market you are in. Get to know your market!

Thanks also for reading and for the kind words,

Kevin

Reply

Danny December 17, 2013 at 6:28 pm

You’re welcome Kevin!
I see there’s a lot of rental activity in the Memphis area, especially single family rentals. I was wondering what the driving force was behind that? what is going on in the larger metro Memphis economy to draw people there?

Thanks again

Reply

Leave a Comment

Comment Policy:

• Use your real name and only your name in the field designated for your name.
• No keywords allowed as anchor text in the name or comment fields.
• No signature links allowed under your comments
• You may use links in the body of your comment, but it must be relevant to the discussion at hand, and not merely be some promotional link.
• We will have NO reservations about deleting your content if we feel you are posting merely to get a link without adding value to our discussion.
If you add value, but still post keywords, we'll use your comment, but remove your link and keywords.
• For more information about acceptable practice, see our site rules.

Want your photo to appear next to your comments? Set up your Gravatar today.

Previous post:

Next post: