Follow Us on Social Media

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

The Two Most Painful Words a Landlord May Ever Hear…

by Brandon Turner on December 20, 2013 · 26 comments

  
Painful Words Landlord

As a landlord, we deal with a lot of crap.

“I’m sorry – I can’t pay rent, my dog got sick!”
“Can you come fix my sink? I think my hamster is down there!”
“I don’t know why my background report has that robbery charge on there! Wasn’t me!”

However, of all the things we hear from tenants, there is one that’s perhaps the most financially painful two words you’ll hear over and over in your landlording career:

“I’m moving.”

What’s the Big Deal?

You’re probably a bit surprised right now.

Maybe you thought I was going to say something like “&$^# You!” or “Marry Me,” but the reality is, vacancy can be the #1 most costly expense to a real estate investor. A plumber might cost $200, a fridge might cost $500, and an angry tenant might cost you some hair loss – but a vacant unit can cost more than all of this combined.

Yes, a home that rents for $900 a month will cost you $900 a month to sit empty, but that’s not even the bad part. Vacancy is a problem because the expenses associated come from multiple angles. For example, when a property goes vacant, you may need to:

  • Remove the tenant’s junk and possibly store it for them on your dime
  • Pay a cleaner to make it move-in ready
  • Pay a carpet cleaner
  • Remodel the property to make it competitive
  • Advertise the property
  • Pay someone to show it (unless you show it yourself)
  • Deal with weird smells
  • Pay someone to fix small repairs (holes, etc)
  • Pay someone to buy and change the locks
  • Add smoke detectors and/or carbon monoxide detectors
  • Extermination if they have bugs (fleas, cockroaches, etc)
  • Possible evictions (if they don’t move willingly)
  • And more.

When I put it all down here on paper (well, virtually anyways) you can see how quickly these costs can add up. A single vacancy for a month may cause $900 in lost rent, but it could easily cost $3,000 or more to put Humpty Dumpty back together again.

Furthermore, what if the new tenant leaves in six months, and you have the same costs again? What if you have two at the same time?

Clearly, vacancy is a HUGE expense, so it makes sense to approach it with a business mindset and ask yourself “how can I reduce this expense?”

It Get’s Worse

If you are a multifamily investor like me, this problem is even worse.

Why? 

Because the value of an income producing property is intrinsically tied to the income and expenses. For those who don’t know what I’m talking about, let me give you a very quick overview of what I mean.

When buying single family homes, it’s easy to compare one house to another. 3 bedroom in House A, 3 bedrooms in House B. However, how do you compare a 24 unit apartment with 8-one bedrooms, 13-studios, and 3-three bedrooms with… anything else? There is nothing to compare it to! So appraisers use what is known as the “The income capitalization approach” which compares the cash flow from one property to the cash flow of another. I’m not going to go into tremendous detail on how to actually do these calculations, but I recommend you check out Ali’s awesome post “Rental Property Numbers so Easy You Can Calculate Them on a Napkin.” (And yes, she really calculates them on a napkin.)

The basic idea is this: the more cash flow the property gives, the more value it’s going to be worth. Dramatically.

For example, if you are living in an area where the average “Cap Rate” is 10%, and you have a 24 unit apartment building that brings in $180,000 per year in gross income – the difference between a 5% vacancy and a 15% vacancy factor can change the value by $180,000.  Yes you heard me right… $180,000 – and that’s not even counting the numerous extra expenses that accompany the vacancies (the stuff I talked about in the list above) which could drop the value hundreds of thousands of dollars more.

(Quick Tip: this math works both ways, so look for income producing properties with management problems and high vacancies. Improving that same property from 15% to 5% could gain you hundreds of thousands of dollars in equity!)

Four Easy Tips for Minimizing Vacancy Expenses

So, we know the problem: Vacancies are financially painful.

However, is this an inevitable part of being a landlord? Should we just chalk it up as “the cost of doing business” and move on?

NO! Vacancies ARE inevitable, but the massive losses to your business because of them are not. I’ve said it time and time again: most of the problems a landlord faces are a direct result of the landlord not running his business like a business. So let me offer a few suggestions for reducing those vacancy expenses in your properties – no matter what size or style of investing you engage in.

1.) Screen Well

If you know me – you know I harp on this ALL THE TIME. Screening your tenants is SO important before you move someone into a property. However, just screening for felonies or bankruptcies is not enough. A good tenant screening process means looking at the whole picture. Will this person stay for a long time? Will they be too hard on the property? Do they have a history of being good to their landlords? Don’t skimp on the screening – look for the best tenant who will stay the longest.

For the step by step process I use to screen tenants, don’t miss “Tenant Screening: The Ultimate Guide.”

2.) Keep Communication Open

As Paula Pant pointed out in her recent article The Surprising Truth Behind Tenant Turnover, many tenants move for reasons that could be easily avoided, like simple maintenance concerns or desired improvements. Talk with your tenants frequently and find out what they need or want. You don’t have to give them everything, but sometimes it’s the little things that matter.

3.) Keep  Your Rent Competitive

For a lot of tenants, the rental price is the most important determination of whether they stay long term or not. I’m not suggesting you cut your prices, but make sure you are in line with the other properties in the area, or just slightly below. This way, you’ll fill units faster AND make moving because of the price a non-issue for your tenants.

4.) ALWAYS Charge a Security Deposit

Yes, a lot of vacancy problems are unavoidable. People do move, and that’s part of life. However, if you don’t charge a security deposit (or don’t charge a high enough one) you will find yourself holding the short end of the stick – so whack yourself in the head with that stick and learn from your mistakes. Always charge a security deposit to cover the repairs and other expenses during a tenant turnover.

Conclusion

What do you think? Do you have any more tips for avoiding the dreaded “I’m Moving” words? Share your thoughts below!

Photo: Ben Raynal

Email *
  



{ 26 comments… read them below or add one }

Trevor December 20, 2013 at 1:59 pm

Give them incentives for on time pay, and good up keep. 10% off the 13th month. Maybe a $ 25 gift card to local food store.

Reply

Brandon Turner December 20, 2013 at 5:45 pm

Great tips, Trevor! Thanks for sharing!

Reply

Sharon Vornholt December 20, 2013 at 2:54 pm

As always Brandon, you have nailed the topic.

Being a landlord is not always fun, but if you treat it like a business it will sure be a lot easier. By having systems and procedures you follow every time, you will you keep your business running smoothly and your sanity (hopefully).

Sharon

Reply

Brandon Turner December 20, 2013 at 5:47 pm

Thanks Sharon! It’s so true! Those with systems, succeed! :)

Reply

Rita Phillips December 20, 2013 at 3:40 pm

Yep…couldn’t agree more. The only thing I’d add would be use your instinct when choosing a tenant. Maybe they seem to be the ‘perfect’ tenant….good credit, no pets, immediate occupancy, etc, but if your gut is telling you something is not quite right, it usually is. Thanks, Brandon!

Reply

Brandon Turner December 20, 2013 at 5:49 pm

Very true Rita. Instinct is so important!

Reply

Jamie Sloan December 20, 2013 at 6:39 pm

You make some really good points, Trevor! As a Realtor who specializes in rentals, very early on in my career, one of my clients explained to he is a firm believer there is more to a good tenant than just one who pays on time. He said that as a Property Investor he wants a tenant who not only pays on time but one who will also treat his property like their own. One really great way to aquire this kind of tenant is to go the extra mile by offering a large incentive. He will have written right into a lease that there will be a quarterly inspection and if the condition of the property remains high during the first three quarters of the year – he will rebate one half of December’s rent on December 15th. That half months rent keeps a tenants “eye on the prize”. Since learning that lesson all that time ago, there hasn’t been one investor that I have dealt with who hasn’t followed that very simple advise. I know it may seem like a lot of money to offer a half of a months rent back to the tenant but it can be one hell of a lot cheaper than the alternative!

Reply

Steve Babiak December 20, 2013 at 7:09 pm

Brandon,

Good post. But you have to make a correction (a mistake you probably picked up from reading forum posts with that very same mistake). That would be referring to Co2 detectors when referring to carbon monoxide alarms/detectors (only one O – for oxygen – in MONoxide).

Reply

Brandon Turner December 21, 2013 at 3:15 pm

Oh oops! I even knew that and still messed it up! I’ll fix it now :)

Reply

Gerald Harris December 20, 2013 at 7:52 pm

When I acquired my first piece of rental property in 1998 I solved half my problems with a potential tenant by screening them. I went 2 months without rent and my house just sitting there vacant before i put the right person in the property. Now, I must say, I don’t recommend keeping your property vacant for this long of a time, I do wish to tell your that I made the right move. Not only did my new tenant, a recently divorced man watch over my property, he painted it, landscaped the yards all on him! This is when I truly discovered that putting the right person in the property by screening them was the key to “property longevity”. My management company actually began educating me this. Great Article!

Reply

Brandon Turner December 21, 2013 at 3:17 pm

Thanks Gerald – and excellent advice! Sometimes a longer vacancy upfront can be the best in the long run. Thanks for the comment !

Reply

BW December 21, 2013 at 1:24 pm

Um, water damage? I’d put that in a close second. Amiright folks?

Reply

Brandon Turner December 21, 2013 at 3:14 pm

Ha yeah – that always freaks me out. Or perhaps ‘I’m Suing” might be a scary one also!

Reply

BW December 21, 2013 at 3:18 pm

Yep, that one would strike terror into my heart as well!

Reply

Alex Craig December 21, 2013 at 3:37 pm

“I filed bankruptcy” is worse then “I’M Moving” in my opinion.

Reply

Cuong Le December 21, 2013 at 5:27 pm

Thanks for the post Brandon. We agree that screening is a huge reason why our tenants have stayed with us. When it’s time to renew the lease and the rent hasn’t increased much, we just keep our rent the same for them. Losing a month on rent to gain $20 for rent each month is not worth it. We send them Christmas cards and try to stay in contact with them at least once a quarter to see if everything is ok. A huge plus to tenants is also how quickly you respond to legit repairs. Thanks again.

Reply

James December 22, 2013 at 9:46 am

Interesting read.

I have been a rental property owner (I don’t like the term landlord) for over 10 years. I screen, screen, screen my potential tenants. Most stay on average 4.5 years.

My experience has been that renters, in general, have the mentality that they are “doing the owner a favor by renting from him/her”. I quickly let them know that I selected them from many others wanting to live in my properties.

I ALWAYS have the upper hand and with that attitude, I have very few problems. If a tenant does not respect my property, I tell them to leave. In 10 years, I have told 3 tenants to leave. I’ve never had to evict anyone by the way in over 10 years as a rental property owner. Most recently a woman (tenant for 3.5 yrs.) decided to move in her boyfriend without my permission (I noticed the water bill, which I pay, go up quite a bit). She refused to tell me his name (said that it was ‘none of my business’) and with that I sent her a certified letter giving her notice to vacate.

Does anyone else out there manage their properties with the mentality that the owner has the upper hand and not the tenants? By the way, I found a qualified tenant in 15 days and it was January in Wisconsin. A nice unit for reasonable rent will go fast. Tenants often forget how good they have it! My business is just that…my business!

Reply

Johann December 22, 2013 at 2:06 pm

I guess it all depends on your tenants. “I’m moving” were the BEST words I ever heard from a PITA section 8 tenant in a recently purchased property! I replaced a high maintenance large family with a low maintenance lovely older couple.

It also depends on your market. As long as the place is in decent shape I can often re-rent without even losing a month. Additionally, since we’re the type that is reluctant to raise rent on tenants, saving raises for turnover, it’s a chance to see what the market says the unit is worth.

Reply

Dave Tanner December 23, 2013 at 7:33 am

Turnover kills the bottom line! Overly simplified fictitious case study: Gross rents in= 100,000/yr. After all expenses you keep 30,000 in net profit (with 0 vacancies). If you have 10% vacancy it costs you 10,000 straight to the bottom line. That’s 1/3 of YOUR profit! It has a huge effect on the what you keep in a yr. Tenant retention is worth looking into. My winning formula is 3 things: have units nicer than average, priced a tick below average, and respond quickly to requests. I’ve average around 1% vacancy for the last 3yrs, never over 3% in the last 10 yrs. If my renters move to another apt they would have to pay more and get less, so they stay. Most of my move outs are ppl buying a house of their own or relocating, I almost never lose them to another apt in our town.

Reply

djopgenort December 23, 2013 at 11:21 am

I’ll agree with all of the above — screen like crazy, make repairs promptly. I’ll add another one – respect. Being polite and courteous to your tenants goes a long way, and is absolutely free. Even if our renters may be “lucky” to rent our property they are still also our customers.

Anyone remember going to a restaurant where the food was really good, but the service was rude & didn’t seem to care? Were you inclined to go back?
Compare that to the local breakfast diner where the food isn’t great, but the waitresses are cheerful, friendly, and any problems are fixed quickly and cheerfully.

Reply

Do December 25, 2013 at 11:38 pm

I’m a renter and a very good one AND like any customer/client like me, I do have my choice of places to rent, usually; so anyone with the attitude that they have “the upper hand”, best be well versed in the law and aware of social media and it’s usage these days. It may not happen right away but word of mouth about treatment by rentees is taken seriously by some of your better tenants, and social media helps spread that word, good or bad, much quicker than days of old. Now a days, good tenants like me, without perfect credit or excessively high income, relay our experiences to others or post them. This unfortunately leaves many of the more “good looking” on paper type tenants (mediocre) to those rentees, with the “James” type attitude. I don’t want to start any relationship as an adversarial “I have more power than you” type attitude. You are offering something that I am seeking; if you come across as someone “that I should thank my lucky stars for choosing me” , not only will I probably not rent after all from you, but if I do, I’ll be looking to move much sooner, and relay my experience through word of mouth, social media, etc. ( I usually have back up places to rent, in mind, and because of my excellent references regarding property treatment, I don’t have a hard time finding other places to rent). If you want great tenant/owner relationships, goodwill and appreciation go a long way. Oh, and I receive rental assistance due to health issues, but I still expect and demand good business relationships. Those who rent to me, only need to paint and shampoo, when I move, if that’s their hygiene policy. I always leave my places better than I received them, and I evidence this well. Respect. It goes both ways.

Reply

James December 26, 2013 at 7:10 am

@Do – Perhaps, you misunderstood my statement about having an ‘upper hand’. You sound like you would be a very good tenant. I stated that most of my tenants stay an average of 4.5 years. An engineer living in one of my units just got a great job in Brazil, so she gave notice. She lived in my property 2.5 years and left in very good standing. However, citing the example that I gave, if a tenant moves in a stranger e.g. her boyfriend without my permission and then refuses to tell me his name…then her tenancy is over and that is what I meant by ‘upper hand’. I will never compromise the safety of my other tenants and the neighbors by allowing a strange person to move into my building. A terrible property owner would have allowed it with a ‘wait and see’ attitude, because he/she didn’t want to have to ask the tenant to leave and then go find another tenant because it is a hassle (probably because the unit is not that nice and hard to rent). Not me, I have the rules laid out clearly in my lease agreement and I stick to them as should the tenant or else I will tell them to leave.

Reply

Do December 26, 2013 at 9:46 am

James,
I did misunderstand; I apologize. I appreciate when things are clearly spelled out in a lease, provided that they are meaningful to all. Not allowing a stranger is certainly meaningful, as you could subject the community to potential dangers; as someone with a young child, I appreciate that.

Reply

Do December 26, 2013 at 2:38 pm

However, James, I’m not sure I misunderstood the comment regarding the “mentality”. I think both parties should appreciate what the other has to offer, which in turn creates a meaningful relationship, built on respect. I do believe an owner should be thankful I chose their property and vice versa, I should appreciate that they chose me.

Reply

James December 26, 2013 at 6:13 pm

@Do – fair enough and I accept your apology. I agree that there should be a relationship built on respect between the tenant and the property owner (a 2-way street). My tenants stay as long as they do because in return for their respect of me, my property and rules, I give them a well-maintained, safe and reasonably priced (slightly below market value) place to live. A win-win for everyone involved!

Reply

Robert Adams January 9, 2014 at 7:43 pm

Yes a lot of newbie investors do not realize how damaging those words can be to cash flow. Vacancies, rehab costs, etc eat up profits faster than any other factors on rentals. Good post.

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: