An Easy Way to Reduce Vacancies and Rental Property Turnover

Vacancy and turnover can wreck your rental property’s cash flow. Just a one month vacancy can wipe out a year’s worth of positive cash flow, and the cost of repairs and advertising when tenants move out can easily equal one month’s rent or more. Mike recently wrote about some great tips to minimize the cost when tenants move out. Today we are going to describe three marketing strategies that Mike and I have used to encourage tenants to sign two and even three year leases. With long-term leases, property turnover, repairs, advertising and vacancy costs all go down, which means profits go up. To my surprise, many of my friends who invest in real estate do not even try to market long-term leases. All of their tenants sign 1-year leases, and they end up finding new tenants almost every year. Using the strategies described below, we’ve found it incredibly easy to sign up tenants for longer term leases. In fact, with our four properties today, 2 tenants are signed up for 3-year leases, one for a 2-year lease, and one for an 18-month lease.

Offer a lower initial rent

When Mike and I first started out, we offered a lower rent for a longer term lease. A typical strategy for the homes we buy would be to offer a 1-year lease at $1,045 per month and a 2-year lease at $995. Over the course of two years, we’d lose $1,200 as compared to the $1,045 1-year offer, but we avoided what surely would be greater costs if a tenant under a one year lease moved out after the first year. While some 1-year tenants would choose to stay in the home under a new lease, a long-term lease locks them in and avoids the hassle of renegotiating leases every year.

We did make a mistake with this approach when we first starting investing in real estate. We should have included in the lease an automatic rent escalation each year. We do that now as I’ll explain in just a moment.

Reduce the required deposit

This one still amazes me. To encourage prospective tenants to sign longer term leases, we have reduced the required deposit. Usually we reduce the deposit from one month to one-half month’s rent. In the case of a lease-purchase described below, we have sometimes eliminated the deposit altogether. We’ve found that tenants want to reduce the upfront costs of renting as much as possible. Even saving a few hundred dollars at the start has motivated prospects to sign long-term leases. While this certainly involves calculated risk, it’s worked out well for us so far.

Promote the long-term lease-purchase agreement

A lease-purchase is nothing more than a standard lease which also gives the tenant the option to buy the property. The details of a lease-purchase are beyond this article. But the basic idea is to agree up front to the purchase price, and then rent the property to the tenant long enough so that they can save up the necessary down payment. This time also allows them to repair their credit if necessary. Our standard lease-purchase term is three years. In future articles we’ll be describing in more detail our lease-purchase program.

Automatic Rent Escalation Clause

The one potential downside to a long term lease is foregoing yearly rent increases. We’ve solved this problem by including an automatic rent escalation clause in the agreement. These increases are typically modest, somewhere on the order of $20 per month for a $1,000 per month property. For us, however, the rent increases are significant. Assuming a property is enjoying a positive monthly cash flow of $100, a measly $20 per month jump in the rent increases our bottom line by 20%. And the increase is so modest that tenants generally do not mind agreeing to it up front.

Question: Do you push for longer term leases, and if so, what are some of your marketing strategies?

Tagged as: lease purchase, real estate investing, turnover, vacancies