The Two Most Painful Words a Landlord May Ever Hear…
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!”
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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:
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.
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.
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