Example of why landlords shouldn't be afraid of vacancies

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Example of why landlords shouldn't be afraid of vacancies

JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes

Over the last month, we had an unusual situation in that 5 units all came vacant at (roughly) the same time as leases were ending; instead of tenants renewing, two bought houses, one couldn't navigate steps any longer, one changed jobs out of town, etc. With 4 of the 5 re-rented, the net cash flow increase was over $300 per month cumulative, and one of the units was in need of some rehab work, which the vacancy gave us the chance to complete. 

Most of our properties are not leveraged, so that is an advantage that someone with leverage might be missing somewhat, but even so other than the unit that needed rehab, all of the units had just a few days vacancy to allow for cleaning between tenants. 

Just thought I'd throw that out there, because there is a common fear especially among newer landlords of vacancies. Sometimes vacancies gives you a good chance to reset units to market rates, as my experience is that even the best landlords tend to lag market slightly for their good paying, stable tenants. 

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Ryan MurdockPro Member
Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
9y

@JD Martin Good post and I agree, vacancy can be a good way to "reset" a unit to market rents.....although they are usually a lot more digestible for me one at a time as opposed to an entire building emptying out at once LOL.

Filling a vacancy quickly at a higher rent also gives me more confidence when considering rent increases within other units of the same building. 

In a 6 unit building if I have 5 identical units renting for $900/mo and I fill the one vacancy very quickly for $1000/mo I instantly have more leverage to raise the others closer to that $1000 mark as well. 

Conversely, if for some reason I can only get $850 for that vacancy I know I better leave the other ones alone at $900 for awhile.

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  • Frank Chin
    Investor · Bayside, NY · Member since 2017 · 1k+ posts · 1k+ votes
    9y

    Good points.

    At one point, we both had professional jobs, and some years back, had four vacancies that almost all occurred at once. It was a struggle, but the increased rents was a relief.

    We're now retired, mortgages paid off, had two vacancies that happened one after another. Unfortunately my wife first came down with pesticide poisoning, then the shingles this past Xmas. That was the bad news. The good news was we couldn't believe rents really exploded in NYC here, and we were charging long time tenants around $1,250 in rent for a 2BR, raising it by $50.00 in the last 12 years. We couldn't believe quotes of $1,700 to $1,900.00 currently listed. While we were thinking about it, the tenant we had mentioned his apartment will be vacant soon, and thinks the landlord would want $1,700 for it, without checking with us. Then he told us there's three couples who wanted the apartment for $1,700, as is, and for July 1, and asked us to talked to them. He vacated June 23. So now it's rented for almost $450.00/month more. The only thing is, the fridge is a little dated, the new tenant mentioned it, so yesterday we bought one on sale for $566.00 delivered.

    BTW, the new tenant's former landlord just raised his rent on a 2BR to $1,950/month.

    The other rental, a SFH, we went through 2 vacancies in the past 2 years, and raised the rents by $300.00/month, but still about $300 below market. Be that as it may, we're now collecting $750.00/month more thanks to the hot market.

    After all of this, I'm still trying to get my head around these new rents. Yes, vacancies can be a pain. Thank goodness I'm the one collecting these rents, instead of paying it.

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  • Ryan MurdockPro Member
    Rental Property Investor · Austin, TX · Member since 2016 · 1k+ posts · 1k+ votes
    9y

    @JD Martin Good post and I agree, vacancy can be a good way to "reset" a unit to market rents.....although they are usually a lot more digestible for me one at a time as opposed to an entire building emptying out at once LOL.

    Filling a vacancy quickly at a higher rent also gives me more confidence when considering rent increases within other units of the same building. 

    In a 6 unit building if I have 5 identical units renting for $900/mo and I fill the one vacancy very quickly for $1000/mo I instantly have more leverage to raise the others closer to that $1000 mark as well. 

    Conversely, if for some reason I can only get $850 for that vacancy I know I better leave the other ones alone at $900 for awhile.

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  • Account Closed
    Professional · Brooklyn, NY · Member since 2017 · 624 posts · 147 votes
    9y

    @Jd Martin Not sure about your math but usually, vacancies = bad; 100% rented = good. Also, if I read this correctly, if you are saying net cash flow of $300 for all 5 units, that sounds sort of thin compared to what was paid for the property.

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  • Jose Matuk
    Investor · Dallas, TX · Member since 2016 · 84 posts · 33 votes
    9y

    The way I read it Mike is: (newbies) don't be afraid of vacancies, they're usually a good opportunity to reset units and rates. I think this all applies if you bought correctly in the first place, desirable neighborhood, path of growth, etc.

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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Account Closed:

    @Jd Martin Not sure about your math but usually, vacancies = bad; 100% rented = good. Also, if I read this correctly, if you are saying net cash flow of $300 for all 5 units, that sounds sort of thin compared to what was paid for the property.

    Net cash flow increase, not total. And the point is that a lot of people are so terrified of vacancy that they accept long-term below market rates, or accept the first borderline tenant that comes along, or put up with BS from the current tenants. It is an illustration that turnover and vacancy can work in your favor. 

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  • Bettina F.
    Investor · Post Falls, ID · Member since 2016 · 606 posts · 699 votes
    9y

    We paid cash for our building, which was fully rented at the time with some marginal, PITA tenants.  Our building is 6 units, and cash flows with just ONE unit rented.  It took us about 6 months to realize that, since we had no mortgage to meet, we did not have to put up with any tenant B.S.  So, as soon as leases were up, leases were not renewed, and units were scheduled for remodeling.  We were very busy that first year but the increased rents and the upgrade in tenants were so worth it.

    Having a planned vacancy that allows you to upgrade the unit, reset to market rents, and appeal to a higher quality tenant is a good thing.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @JD Martin  I think the terror comes from those that bought low end D and C class. .vacant means the chance of break in theft and vandalism goes up exponentially.. to the point in some areas were 2 to 3 days of vacancy and you get your home stripped.. IE condenser stolen.. hot water heater gone.. kids break in etc etc..

    In a normal functioning non threatening landlord environment I concur with your thought process..

    where I see some landlords step over dollars to pick up pennies though .. is they think rent should be 1k and let their unit sit for 3 months or longer... when they could have rented it for 900 or 950 day one.  that's were I see the big boo boo... say it takes 3 months  3X900 = 2,700  /  100 = 27 months to recoup what you lost ... instead of just keeping the cash flow coming..

    Love the no debt that's the way to handle this stuff...

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    @Bettina F.

    Does your property have true cash flow after deducting a 10% return from the rent to cover the opportunity value of your cash or are you counting the artificial cash flow as that being bought by the equity.

    I have never been able to achieve true cash flow numbers from a property without a mortgage with interest rates as low as they are today.

    As for vacancies it is generally the hobby landlords that fear vacancies. They are much happier making less money then having to do the work associated with being a landlord. They lack the skills to do it properly which is what usually causes the vacancy. They are also more likely to intentionally charge rent below market with the  misconception that tenants will stay longer. Obviously your tenants are a perfect example of why that is simply not the case. Tenants leave when they need to, they do not stay longer simply due to lower rents.

    In my situation tenant turn over is always a positive due to the fact that I operate in a rent controlled market. Tenant turn over every 2-3 years is necessary to insure my rent stays at market. I very rarely experience a vacancy with a turn over.

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  • Peter B.
    Investor · Ogdensburg, WI · Member since 2016 · 273 posts · 351 votes
    9y

    @JD Martin

    Agreed. 

    I also had an unusually run of vacancies this spring/summer, deaths and nursing homes were my issue... 9 units in 3 months.. It resulted in a cashflow increase 930. 

    There was a 10k rehab on a house in there.... But non the less Vacancies can be good. 

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  • Bettina F.
    Investor · Post Falls, ID · Member since 2016 · 606 posts · 699 votes
    9y
    Originally posted by @Thomas S.:

    @Bettina F.

    Does your property have true cash flow after deducting a 10% return from the rent to cover the opportunity value of your cash or are you counting the artificial cash flow as that being bought by the equity.

    Now you sound like my stockbroker-- or my old finance professor!  Yes, my building has a positive net present value.  I could have made more money since 2013 if I had invested my $400K in the stock market, but my husband and I already have significant investments in the market.  We bought our apartment building when we sold the big Puget Sound house and bought a less expensive retirement house.  We wanted to keep the same proportion of our portfolio in real estate. (Diversification reduces risk, remember!)  We went with multifamily for ease of turning over individual units and I don't like the binary options of rent/no-rent inherent in SFHs.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    You are right about the stock market. The vast majority of conservative cash buyers have very low returns when all numbers, especially dead equity, is taken into consideration and would do as well or better simply investing in mutual funds. 

    I (most investors) will whole heartedly agree multi is always the preferred path over SFH. SFH is best suited to those investors less centered on cash flow and more centered on their perception of ease of management and appreciation. SFH being the preferred investment for your basic conservative minded hobby landlord looking to get started with little understanding of the math behind real estate investing.

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  • JD MartinBusiness Member
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    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    9y
    Originally posted by @Jay Hinrichs:

    @JD Martin  I think the terror comes from those that bought low end D and C class. .vacant means the chance of break in theft and vandalism goes up exponentially.. to the point in some areas were 2 to 3 days of vacancy and you get your home stripped.. IE condenser stolen.. hot water heater gone.. kids break in etc etc..

    In a normal functioning non threatening landlord environment I concur with your thought process..

    where I see some landlords step over dollars to pick up pennies though .. is they think rent should be 1k and let their unit sit for 3 months or longer... when they could have rented it for 900 or 950 day one.  that's were I see the big boo boo... say it takes 3 months  3X900 = 2,700  /  100 = 27 months to recoup what you lost ... instead of just keeping the cash flow coming..

    Love the no debt that's the way to handle this stuff...

     True that...I see units that sit all the time because they are crazy overpriced. That goes for sales, too. There's a house right next door to one of my units that I would love to buy - it's in a great location and shares the property line with my unit, and it's a bigger house - but it is at least $15k overpriced and they won't entertain offers lower than asking, which is nuts. This house has been for sale for three years!

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  • Shaun Patterson
    Property Manager · West Palm Beach, FL · Member since 2012 · 296 posts · 143 votes
    9y

    @JD Martin  Good points in regards to reseting rents to higher standards. The good thing with your situation is that 1. no mortgage, 2. low vacancy time frame for most of the units. 3. you used the time to rehab the unit which you can then use to increase the rental value of that same unit.  I would also say that the scariest thing for newbie investors isnt really the vacancy, it is the current tenants not paying rent and them not knowing what to do.  

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  • Robert Hutsell
    Del Rio, TX · Member since 2016 · 9 posts · 1 vote
    9y

    I have a question. Our 4 plex has a unit vacant. It has been vacant for about 2-3 weeks (with advertising). With the vacancy, we are still cash flowing around $600 per month. We have had a ton of calls about the property and a couple of showings but nothing serious. We do have qualifying standards (must complete application with background check,  income must be 3 times amount of rent, 0 evictions, positive references, 600+ credit score FAIR) RENT: $550 per month, $350 deposit. Since we aren't getting many showing and are receiving a lot of calls on the property, are our standards too high?

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  • Aaron D.
    Investor · Mount Laurel, NJ · Member since 2017 · 30 posts · 12 votes
    9y

    Robert, 

    My thoughts are to hold the price on it if you are getting showings. 

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