Lesser of the two evils..

9 Replies

Alright landlords, in your professional opinion.

Which would you rather deal with - longer vacancy periods or higher tenant turnover?  

By that I mean - Property A sits vacant for 6-9 months, then gets a tenant for 3 years.  Property B turns over a new tenant every year, but only has 1 month vacancy in between. Assuming that the numbers work out the same (cost of vacancy equals the exact cost of turnover) which would you rather have sitting on your hands?

Sam & Heather Jones I wouldn't really want either of those.  We work to price and have the quality of our properties be at the place they don't sit long, and we keep tenants for at least 2-3 years.  I realize people move out ... but we can turn our properties back over usually within 6 weeks.

Be careful what you are buying ... and making sure it is something someone would want to live in ... and be thinking of that as you are buying, fixing, and marketing it ... 

Good luck!

@Heather Jones

That's a general question that doesn't make sense.  It depends on the exact numbers.  

Whichever costs less.

Sometimes it better to have less turnover and not raise rental rates (if turnover cost will be high and the amount you'll make in high rents will not compensate for this charge). 

It also depends on your model/strategy.  Is your background in property management?  If so, high turnover deals may not scare you and you may build an expertise here.  Most investors though, want steady cash flow with less turnover... 

When I analyze a deal I not only look at the amount of cash flow it will generate, but also the risk associated with this cash flow (is there high risk that it will not be steady).  This is really what a "Cap Rate" is, is the risk associated for a given level of cash flow (generally higher risk deals have a higher cap rate)... Example MF in San Francisco see cap rates of 4% or less, whereas it is common to see cap rates of 10% or higher in Dallas and other cities.

I agree with @Nathan Brooks  

You don't want either.  The other thing that hasn't been mentioned is the opportunity costs associated with either high turnover or prolonged periods of vacancy.  Either case, particularly if you are self-managing the property, is going to take time away from your other activities.  You're going to be dealing with the showing, screening and make ready tasks associated with getting a new tenant or turning over a property for a new tenant.  What opportunities did you miss, while you were focused on those tasks?  What is your time worth?  Those are very real considerations I would factor into my equation.

Sorry guys, I was just trying to start a discussion and see where the preferred risk is from those who have been there, done that.  I was on the phone with my husband, discussing random hypothetical situations (and a few of other peoples real life problems) and I said "I am confident enough in my marketing skills that I would much rather put in new tenants every year" and he said "Nah, I much rather have it sit vacant for 6 months and only have to paint once every 3 years."

Now that I realize the err of my ways and that a) all properties acquired should be stellar and b) I probably should have done math to give numbers instead of just saying "assuming that the numbers work out the same" I will head back to my silent corner of noobness where I am seen and not heard ;)  

I purposely rent my places at the 20 to 50 percentile mark to avoid vacancy.

Originally posted by @Heather Jones:

Sorry guys, I was just trying to start a discussion and see where the preferred risk is from those who have been there, done that.  I was on the phone with my husband, discussing random hypothetical situations (and a few of other peoples real life problems) and I said "I am confident enough in my marketing skills that I would much rather put in new tenants every year" and he said "Nah, I much rather have it sit vacant for 6 months and only have to paint once every 3 years."

Now that I realize the err of my ways and that a) all properties acquired should be stellar and b) I probably should have done math to give numbers instead of just saying "assuming that the numbers work out the same" I will head back to my silent corner of noobness where I am seen and not heard ;)  

 I appreciated the attempt at starting the discussion.

To answer your question, I personally would rather have a longer vacancy, even if it cost me a little bit more, in exchange for a longer term tenancy. One of the things I hate the most is turnovers. The time and cost to fix/clean, then the marketing and screening are all things I'd rather avoid. 

Sam & Heather Jones 

Nathan and Hattie are correct, neither is what you want.  In our residential units we strive to have them leased before they go vacant, but every once in a while you get a curveball ... all of our curveballs have been tenants we inherited when we purchased a property.

Our current situation were long term Tenants (9-yrs) who bugged out and left the unit in a terrible state: ruined floors, broken doors, missing light fixtures, etc.   Kinda the worst of both your scenarios, plus one you didn't mention: long term tenant, followed by a long vacancy - one month before we have legal possession and have removed their chattel and 4-6 weeks beyond to refurbish the property ... we'll be lucky to have it rented by Jan.

@Heather Jones   Good, long term tenants are worth more in peace of mind than 6 months rent. I'd take the vacancy than just throw someone in for the sake of having it rented.

BlueVirtuePro[email protected]

We aim for longer term tenants and have the reserves to survive a longer than anticipated vacancy. An empty unit may become a target for vandals and thieves, cost you more in utilities and your insurance company may drop you if it sits empty too long. So best to do everything possible to rent up with a quality tenant as quick as you can. In my experience... "Quality trumps Quick." 

However, some folks market short term rentals and do quite well, garnering a higher price per unit for intentionally renting to short-term folks.  Some even do so with furnished units... so it depends on your market.

I like what @Hattie Dizmond  said about "Opportunity Costs"... even added that to a file I keep of "BP Wisdom"! Thanks!

Sam & Heather Jones Thanks for engaging in BP forums and starting a topic!