When I first started investing in real estate I remember everyone said turnover is expensive and is what kills investors. I will have to disagree, I love turnover! I allow all of my tenants to break their leases at any time. Let me explain why!
Maybe you like or dont like how I am running my business but that is what this website is for. Please comment and let me know your opinions and lets get a great conversation going so we can all learn!
I own a number of small and medium sized multi family properties. A 4 unit, 3 unit, a 16 unit, and an 8 unit set up as 4 duplexes. The town I invest in is relatively small, only about 15k people. The economy would be considered flat amongst all standards. However, there are a half dozen very strong employers who need to find great manufacturing and engineering talent. This tends to bring in a consistent flow of new professionals into town to try their hands a company, see if they like it, and if so they make the town their home, and they dont like it, tend to leave within 6 months to 2 years. Ok, so lets get to the point.
Why I Love Turnover
- My tenants can break their lease any time, no questions asked, but pay a 2 month penalty.
- I charge $250 to move in, and $150 on the move out as non refundable fees. I got rid of security deposits and have never had a damage issue
- If there is a situation like a travel nurse coming into town and they want a 3 month lease I usually charge $750 a month for a unit that would normally rent for $625, but all fees still apply.
- Typically I can fill a vacancy within 5 days to 3 weeks.
Ok, so you can start to hopefully see some benefits, but lets break it down further. My tenant mix is broken up between long term(like 10yr and 20yr long term) elderly tenants who are on a fixed income and want a quality place to live, and shorter term young professionals who typically stay between 6months and 24 months.
This mixture works very well for me. I have ground floor units which long term elderly tenants love. I fill those units and they generally stay until the inevitable end of life event occurs. Sounds bad, but they are extremely happy in our property and we offer some great amenities that no one else in our town has. Typically they actually tell me they are staying until they die so I just smile and say as long as you keep paying your rent each month and give them a little chuckle. Rent wise, I am usually a bit under rent with these tenants as they are fixed income and I don't want to hit them with too big of a rent increase. They generally never complain, dont damage their units, so I am ok with the longterm residents being $10 to $20 under market. However, when these units do turn the new elderly tenants get charged slightly above market rate rents because our waiting list is so long for these tenants to move in.
The young professionals I target to fill all upper floor units. I have had great luck with these tenants as they are generally all college graduates who are engineers and nurses. They have always been clean, paid their rent on time, and been courteous to the other residents. So far so good. I usually have the newer updates in these units to make sure in online searches my units always look 10x better then the competition. I also charge a bit more then the competition because of this. Generally I can fill these units within 5 days to 3 weeks. Since I usually have an advance notice of 30 to 60 days I usually have only a 1 day vacancy allocated to have my maintenance manager do some quick cleaning although its usually not needed.
Here is where it can get exciting.
When a tenant turns I receive $400 worth of fees for the party moving in and the party moving out. If the tenant breaks their lease early they pay a 2 month penalty which is generally around $1250 total. Since I have almost always been able to fill the unit right away I make double rent payments on a unit for the two months after the first move out.
In the above scenario, I will make $1650 in extra income if this happens. I have actually had instances where a tenant breaks their lease early, a travel nurse took over the lease right away, vacated the property within 5 days due to unforeseen circumstances(agency pays their fees), and filled the unit again with a new young professional. Within that year, I earned an extra $3600 on that single unit.
So how does it get better? If I can show consistently, year after year that the multi family property(mainly my 16 and 8 unit) brings in an average of $3000 in fees/other income which go directly to increasing the Net Operating Income, at a 10% cap rate, that puts my property value $30,000 higher. By simply changing your rental policies, having a good plan to market your units quickly to a demographic that is underserved, you can receive great bonus annual cashflow and increase your properties value (as long as it is valued using the income approach and you show consistency).
Let me know your thoughts!
Take Care BP!
you have a unique situation and are hands on.. the average hands off or out of state investor.. turn over kills them.. its rarely less than 1k to turn over a unit.. they have usually about 1 month vacancy ( getting the unit ready for new tenant) and they have a 1 month lease up fee ( sometimes less but one month is common) so turnover in a given year takes up about 30k of their gross revenue for that year.. that's why folks say turn over kills cash flow because for the owner that does not self manage or do what you do which is run a quasi boarding house.. it does affect cash flow negatively..
However congrats on creating a nice niche for yourself in your little town..
30% not 30k LOL
@Joel Florek you are turning the units yourself right? Or you have local, trusted contractors. That is the difference right there between profitability or losing big money!
@Jay Hinrichs While I would agree to an extent, I live 400 miles from my properties and in another state so I am actaully in the same boat as those out of state investors. I am hands on though, but my systems and tenant niche make it easy.
I hired a part time maintenance manager who helps with some aspects of the process(showing or checking on things) but I handle all of the marketing and screening remotely. Usually I only show the property to 1 person since I prequalify in advance and only show units to people who are serious about moving in. Most of the time I never meet the people I rent to other then conversations by email and phone.
@John Warren as you know I travel to my properties once a mont to check on things and I handle most capital improvement projects myself. These improvements are not usually related to turnover, but general upkeep of the property often in projects inside units that longterm tenants have been living in. But, with respect to tenant turnover there has never been anything needed other then 20min to 30mins of wiping down counters and the fridge. Some day I will get hit and will have to deal with the issue but based on my last 15+ turns I havent had an issue. Tenants are responsible to have carpets cleaned, and responsible for all damages. My tenants have always done a good job of cleaning so contractors have not been needed.
@Joel Florek your in tenant heaven LOL.. good job.. this is so not the norm as you probably know..
@John Warren Also think of class. I am renting B class units to the young professionals who could afford to live in A class properties which we have but they want to save money. A 24 or 26 year old who makes $80k a year and works 50hr to 60hr a week in a demanding job.
Tenant turn over is a blessing or a curse. If you invest long distance turn over is generally very inefficient and will cost money. Investing locally usually means two things that benefit investors. They first do regular inspections and by dong so do immediate repairs and charge tenants for damage as well as keep the units up to standard while tenants are in place. When a tenant gives notice there is next to no turnover costs and usually a new tenant can be located before the old one moves out.
I operate in a rent control market. What this guarantees is that all rents will be below market if you have a tenant staying longer than 2-3 years. In rent control markets you never want long term tenants. Not only do they kill your income they also devalue your property when it comes to selling.
I love turnover, problem is it does not happen often enough. Long term tenants are bad for investors if rent is not maintained at market. Inefficient mom and pop lazy landlords however tend to love them even at below market rents. They prefer not to actual have to work their investment as opposed to maximising returns. Hobby landlords.
Is it legal to charge two months rent for a lease termination and then get someone new into the unit right away? I thought you could not double dip rent like that.
@Sarah D. Rules and laws change depending on the state you invest in. For some states you are correct in this statement. You need to review your states laws where you invest to confirm what you are and are not allowed to do.
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