I am getting ready to close on my first rental this week in the Cleveland area. I have run the numbers and it makes sense for my goals. I have been using the BP calculator using real numbers and rules of thumb. The couple rules of thumb that have bothered me are vacancy and property management (PM).
The vacancy rule of thumb is 1 month of vacancy per year. It takes time to turn a unit over and find a new tenant. This works out to 8%/ month or 8.33%/ month for those who like more significant digits.
What has bothered me is that with a 12 month lease it is the 13th month that the unit is vacant. I would need 11 month leases to get the 8% vacancy. I am sure to make the math simple and to be conservative teachers use this 8% number.
With vacancy every 13 months I must look at a longer time horizon. 3 or 5 years. In three years there will be 2 months of vacancy (5.6%) and in 5 years three will be 4 months of vacancy (6.7%). Is 8% a terrible number for vacancy? No, just on the high side which may not make sense for some markets. Turnover every lease also means to me the property is in a C-D class area and/or there is poor management of the property. I don't see a reason to over estimate this.
The other rule of thumb that bothers me is property management being 10%. There are some low cost online PM companies and flat fee structures out there. It does seem like the majority fall into the 8-10% range locally. I was talking to a co-worker that just got his second property and he told me that he pays 8%/month and 1 month rent for a new tenant placement
These means that every vacancy represents TWO MONTHS of lost rent! One month due to time and one month due to fees. Where is that in the BP calculators? Using the percentages from above I think I need to add 5.6% to 6.7% to property management in my calculations. This should be added to PM line because if I self-manage this fee goes away but vacancy does not. This makes it 16% monthly for property management. This to me represents the truer cost of theoretical property management.
In summary the previously numbers I used for PM and vacancy was 10% and 8% totaling 18%. Now I think I should use 16% PM and 6% vacancy totaling 22%. I may also have to re-think my profit per door target using these higher numbers.
Does this make sense or am I over thinking this? Are you using different numbers?
Agreed, it will Never be exactly whatever you project, 8,10 15%. Yes, your management fee will be double if you have a turn over/lease fee once per year. Your vacancy will be higher if you have to evict, 1 month to evict and one month to turn over/recent. It will be lower if the tenant stays for 2 years or more, etc.
@Account Closed thank you for your replies. I have a target of $200 per door cashflow and with extra 4% a month puts me a little under. I am an analyzer so I think about these things a lot.
@Caleb Heimsoth thank you for the reply. I guess I need to focus now on providing that good clean housing.
Yeah don't over think it. You should definitely account for those costs, but you can't predict the future. What you budget for and what actually happens are rarely the same. :)
I think you are over-thinking slightly. The calculator doesn't take into account tenant placement fees, that's for sure. If you want to make it more accurate, I would break the placement fee into a monthly amount and convert that into a percent combined with the 10% management fee.
A lot depends on your management strategy as well as a little luck. At this point, I am self-managing my units. I've had one property for 6 years and a second property (duplex) for about 2. The longest vacancy I've ever had was 2 weeks. I plan and plan and plan and when a vacancy occurs, I have people in there (or I am in there) as the tenants are moving out and we get it turned over. I always post my rentals while they are still occupied and try to build good relationships with my tenants so that they don't mind if I'm showing the unit before they've moved out.
My last turnover was literally 12 hours. I had one tenant who was falling behind on finances and wanted to break her lease early. I let her out of her lease at the end of the month (3 months early) and in exchange asked that she keep the house clean and allow me access whenever needed for showings, beginning immediately. Two weeks later I had a tenant ready to accept the unit on the first of the following month. Her lease ended on the 30th and her current landlord would charge her a full month even if she was there one day longer. I asked my current tenant if she was willing to be out by the 29th and because I was helping her out, she helped me out. She moved out on the 29th, I had the unit cleaned as she was still moving her stuff out, made notes of repairs and did the quick ones myself that day. I had my handyman in over the course of the next week fixing other things and the new tenant was in the morning after the old one left.
My single family unit is near a college and I rent to college kids. I always do leases that begin and end in June (they end the day of graduation and start the following Monday). My team knows for months exactly what day and time the unit will be empty and having the summer be at the beginning of the lease guarantees that my students won't graduate and leave me empty-handed for the summer months. If they want to live there in the fall, they will be paying for summer whether they plan to stay there or not.
I have also been very lucky. I have avoided the "nightmare" tenants (although I've had quite a few "kind of bad dream" tenants) and I haven't had to deal with an eviction. But If you're dealing with property management company or you have a lot of properties, you obviously won't be able to put that amount of work into having quick turnovers and I'd say 5% would be the most realistic and 10% would be the most cautious numbers to use for projections. It sounds like you'll be using a PM but I wanted to illustrate some of my experiences for some of the drivers of vacancy rates.
It's rare for a tenant to move after 1 year unless repairs are not being made. If you fix issues that come up and provide a clean, functional place to live tenants will stay for multiple years. The fees you mentioned are correct. Just account for all costs when running your numbers to figure out what you can pay for a rental.
Some other ways to help boost profitability is to allow pets. We charge a $250 non-reundable deposit for pets and $50/month per pet. If you have others ways to boost monthly income (pet fee, garage fee, storage area fee, etc) it can reduce the other costs you mentioned.
Thank you all for your replies. @Nick Ferguson thank you for sharing your turnover strategies.
@Jason D. I now agree with everyone else that is saying I am over thinking this. I am getting stuck in the definition not the intent of the vacancy allowance.
@Eddie Werner I don't really want to do pets for this property since it is a duplex, but the current tenant downstairs (on a month to month) has 2 little dogs and a pitbull. Once I get the top unit rehabbed and rented I was going to figure out how to get that pet rent from the downstairs tenant. The downstairs tenant also currently has exclusive access to the 2 car garage. All of this and he is paying below market rent. I will cross that bridge latter I guess.