So i see a lot of people ask what to use when estimating a vacancy rate or a cap expense rate. And a lot of times on pro-forma sheets a vacancy is listed at 5%. I just can't comprehend how that is a realistic number for the Cleveland area. I would like to hear from local investors what their actual vacancy is.
If your PM charges you 1 month fee to place a tenant, plus it takes 1 month to clean and find a new tenant (and this is the best case scenario), you are out of 2 month of rent for that year.
With that, in order to achieve a 5% vacancy your tenants need to stay for at least 3 years!!!
If you have an eviction(a very likely scenario in the Cleveland market), or if your PM does not give a timely 3-day notice. If tenants do more damage and it takes more to repair and clean up. If it takes more that 1 month to find a new tenant then your vacancy number gets progressively worse.
So really, what are you guys getting? Is anyone at 10% or below?
One month out of twelve would be 8.3%
One month out of 24 would be 4.1%
One month out of 36 would be 2.7%
My folks rent out a home in the town where my dad grew up. The same people have been renting it from them since the early 1980's, so long term renters do happen once in a while too.
If the average is 5%, that means turnover just under 2 years (every 20th month). That seems plausible to me. Of course, any individual will have wild swings in their averages based on their house, neighborhood, and PM. Someone with a portfolio of 100's of units, could probably give you a very good number. Call some PM companies in Cleveland, ask how many units they manage, if it's several hundred or more, ask them the vacancy rate in the area you are interested in. It will probably be accurate.
I do think if people are regularly moving out of your houses every 12 months (or earlier), your house isn't nice enough and probably needs upgraded. Of course, if you are working lower end areas, the realities are probably very different. Stable, educated, employed, responsible tenants don't want to move every 12 months. They want to move infrequently and live in a really nice place that is kept up nicely.
Cleveland is a huge area.
In the area I'm at now, which is B or better, I haven't had vacancy yet and repairs and renting is pretty fast. The last house I filled (deposit last week of Dec, move in first week of Jan) took < 1 week for them to fill it once they started advertising. It also only took a couple weeks to be made rent ready and it wasn't cleaning, they did 6k+ worth of work (new garage roof, paint everything, redo wood flooring, a ton of other junk.) To me, unless there's some weird circumstances, a regular turnover should not take a month to clean and find a new tenant. If it needs cleaning a crew can have that done in one day.
Of course, it all depends on the quality of your PM, your neighborhood, and your property.
My first tenant that's coming up on 1 year has renewed for another year, so that property isn't even getting turned over. The 2nd property is the one I just filled quickly, and we're working on a duplex that is going to be a more complicated project, but should be able to rent fast if we do it right.
@Account Closed, thank you for feedback. You must have a stellar PM to be able to place a tenant in less than a week :)! What you are describing is an ideal scenario, which i would like to achieve. But even for that case your tenant would have to stay for another 2 years to be anywhere near 5% vacancy.
Good luck on the duplex!
Actually, you have hit the nail on its head. Avoiding turns is critical. I self manage and one of the skills that I have is picking and keeping residents.(I don't like to call them tenants ). Firm but caring. Gift Cards at Holliday season if they have behaved all year. Don't get too greedy about rental increase. Stay slightly below market. Do your maintenance in a timely manner. I especially love my resident's that have passed the 5 year mark. That being said, I'll evict quickly if I don't feel like a resident is trainable. I think my overall vacancy rate is below 5%, based on 7 years of history
@Geoffrey Schnake, so you manage your "residents" remotely? Do you still use a part-time person to at least do the tenant placement and showings? I'd love to know how that's done.
I realize it's possible to do a much better job when doing self-managing. But it's only feasible/scalable up to a point.
@dmitri korobov. Sorry, missed the fact that you are not local. My way involves only being a local self manager. I don't understand how folks could do what I do without being local and treating it like a business. Didn't mean to hijack your question.
@Geoffrey Schnake, yeah, thank you. I can see how that's possible. I have a local tenant, took 1 week to place, $0 PM and going on the 4-th year.
@Dmitri K. - I'm having trouble following your explanation. I would not consider a leasing fee as "vacancy". It's a management expense paid to your PM company, like paying them for mowing the lawn, or painting the living room.
Example: You have two properties, A & B, which are identical in every respect, and even next door to one another. For A you are using a PM company, and for B you are self-managing. You purchase both A & B on the same day, and sign leases and the renters move in that very day. Both houses rent for $1000. PM charges you $1000 leasing fee for filling house A, and there is no PM on house B. Are you saying house A has "higher vacancy" than house B? Or that the vacancy rate is higher? I think both of those statements are false.
Certainly, house A would have higher expenses than house B, all things being equal, but that doesn't seem like what you are getting at. (Or I just don't understand the question at all.:)
@Account Closed, i think i see your point. It's probably not fair to bunch up a PM finder's fee into a vacancy rate, even though, technically your property is making you $0 that month. So i agree with you on that.
However, my question still stays - it realistic to achieve a sub 10% or even a 5% vacancy? This is pretty much what a lot of deals that are being catered to investors would have as a line item. Are those realistic for a remote investor?
One month out of twelve would be 8.3%
One month out of 24 would be 4.1%
One month out of 36 would be 2.7%
My folks rent out a home in the town where my dad grew up. The same people have been renting it from them since the early 1980's, so long term renters do happen once in a while too.
If the average is 5%, that means turnover just under 2 years (every 20th month). That seems plausible to me. Of course, any individual will have wild swings in their averages based on their house, neighborhood, and PM. Someone with a portfolio of 100's of units, could probably give you a very good number. Call some PM companies in Cleveland, ask how many units they manage, if it's several hundred or more, ask them the vacancy rate in the area you are interested in. It will probably be accurate.
I do think if people are regularly moving out of your houses every 12 months (or earlier), your house isn't nice enough and probably needs upgraded. Of course, if you are working lower end areas, the realities are probably very different. Stable, educated, employed, responsible tenants don't want to move every 12 months. They want to move infrequently and live in a really nice place that is kept up nicely.
This is a really good string as it shows the difficulty in actually assessing a vacancy rate and even defining what it means. I have tried to use our data to calculate this a couple times but the limited data mining tools we have available has not yielded any results that I could share with any confidence.
Given that, I have worked with hundreds of investors in the past. The assumptions they use seem hover in the 5-10% rate. This seems to be consistent with the comments already posted on the subject. Personally, I used 5% on SFR in the suburbs and 10% on mult-family /SFR in the city when I create pro-forma financials.
I do like how @Account Closed calculated it out, then it is just an assumption to the length of tenancy.
So i see a lot of people ask what to use when estimating a vacancy rate or a cap expense rate. And a lot of times on pro-forma sheets a vacancy is listed at 5%. I just can't comprehend how that is a realistic number for the Cleveland area. I would like to hear from local investors what their actual vacancy is.
If your PM charges you 1 month fee to place a tenant, plus it takes 1 month to clean and find a new tenant (and this is the best case scenario), you are out of 2 month of rent for that year.
With that, in order to achieve a 5% vacancy your tenants need to stay for at least 3 years!!!
If you have an eviction(a very likely scenario in the Cleveland market), or if your PM does not give a timely 3-day notice. If tenants do more damage and it takes more to repair and clean up. If it takes more that 1 month to find a new tenant then your vacancy number gets progressively worse.
So really, what are you guys getting? Is anyone at 10% or below?
It all depends on how the property is managed. I personally see around 6%, but if your property is managed poorly, you can see well over 10%. It all depends.
couldn't agree more with @Account Closed's last paragraph - good tenants stay in good properties at least a few years.
My current situation with west side Cleveland/suburb properties that I'd characterize as B/C in good to excellent condition with slightly below market rents ($25/unit):
Single family 44111 = 6 year tenant
Single family 44135 = 2 year tenant
Single family 44111 = new tenant, 1 year prior to that- boyfriend/girlfriend move out because they broke up.
Condo 44070 = 1 1/2 year tenant
Two family 44107 = downstairs 6 1/2 years, upstairs 1 year - 2 year tenant prior to that
A few additional comments:
@David Terbeek, @Tom Ott - thank you for feedback. This is the kinda data i am looking for.
I think i should have been more clear in my criteria. There will be variation between singles and milti-families, aslo the city vs the suburbs. Even within the city there will be variation based on where you are East vs. West. So it's good to hear data for a specific sub-market. This would also help new investors decide where to go. Is it worth going to suburbs and enjoy a lower vacancy, but pay more in taxes and home price vs being in the city.
@Account Closed, i agree that if a property condition is not on par with competition one will experience problems finding tenants, etc. Same goes for really bad property managers. Investors that experience those issues (and don't address them ASAP) will most likely go out of business in a short while. So those are valid points, but it's not what this thread is about. I am not looking for outlier numbers. I am sure there are people that own 1 house in Cleveland and self manage, that might say that they have the same tenant for 10 years. However for a lot of seasoned investors that's not the case. We all experience evictions (regular eviction will most likely translate into a 2.5 month vacancy for that year), break-ins/vandalism, etc. And all that adds up. Thats why i asked for a real-live number for those that have a good sample size of properties and been in the area for some time.
I have a house near a college and I just make sure that I always have next year's tenants lined up a few months in advance. For a traditional situation where that is obviously not possible, I think you have to always figure high on your pro forma and then anything you achieve below that vacancy rate is icing on the cake. I assume 10% vacancy if the property is currently rented and 20% vacancy if it is vacant (at the time I'm looking to purchase). These numbers are high and I'm sure it makes some good deals look bad but I'd rather have a good deal look bad than have a bad deal look good.
I'm at ~93% collected rents / 7% vacancy and collection losses out of possible gross rents on a portfolio of C and D caliber properties on the east side of Cleveland proper over the last year and a half. We've had very little vacancy or collection loss so that's probably about as good as you can do in the lower end areas and might even be a little better than can be sustained long term. Keep in mind that each specific property will be all over the place. I've got properties with over 100% rent collection (due to enforcement of late fees) and one that's under 80% due to periods extended vacancy. One bad tenant / PM / or just spree of bad luck can pull your numbers down. As your portfolio grows, the strongly performing properties will help absorb those hits. In the end, it's all about averages.
If you're dealing with a more stable asset class, a vacancy and collection loss rate of 6-10% is probably a very reasonable goal. I know that at Smartland, our turnkey assets in suburban areas as a whole tend to run at ~6% vacancy rate over a significant sample.
Thank you ,
@Timothy Murphy III, so sounds like the general consensus is that sub 10% is a very realistic number for a vacancy rate. With that, people should still keep in mind that there is a renter placement fee that is often left out in a lot of deal analyses.
Yeah I'd think so. If you're consistently losing more than 10% of gross rents to collection losses or vacancy you might want to re-evaluate what you're doing. Unless there's some unusual and explainable circumstances, you probably have a problem with either your management, your tenant screening process, or the property itself. And yes in addition to monthly management fees you'll typically be paying tenant placement fees and / or extension fees to your PM. PM's charge these fees because their leasing agents get paid commission to place the tenant and you should be aware of this and built these costs into your projections. With that said, keeping long term tenants will do wonders for lowering your vacancy / collection losses, placement fees, and unit turnover costs so do all that you can to keep qualified tenants happy and in place once you have them.