The only thing worse than a vacant rental unit is a non-paying tenant. Vacancies quickly turn a profitable property into a money pit. In fact, minimizing vacancies is arguably the single most important way in managing a property to maximize cashflow. So here is a look at 7 ways to reduce the vacancy rate of your properties.
1. Charge Competitive Rents: We all want to maximize rents. But pushing the envelope may keep the unit vacant for too long. Even losing a single month’s rent can cost you in a year more than the extra rent your charging. Lose more than a month and it could take you a couple of years to make up the difference. Our goal is to find a tenant in under a month. If it takes longer than that, you may be asking for too much rent.
2. Seek long-term rental agreements: While a one-year rental agreement often seems to be the norm, consider offering prospective tenants a two or even three year agreement, even at a lower rent or a reduced deposit. We have offered a reduced rent for a long-term agreement because we know that the cost of finding a new tenant every 12 months is far greater than the discount. Our shortest lease to date has been 18 months, and most of our leases are two to three years.
3. Use modest rent increases: Losing a good tenant over a $50 per month rent increase will cost a fortune. Even if you get the higher rent from the next tenant, it can take more than a year to make up the cost of advertising the property, lost rent during the vacancy period, and repairs to get the property in shape for the new tenant. Furthermore, a modest rent increase can go a long way to increasing cash flow. On a $1,000 per month property, we may raise the rent only $25, or 2.5%. But if the property’s cashflow is $100 per month, that small rent increase will add 25% to the bottom line.
4. Automate yearly rent increases: Seeking yearly rent increases can encourage tenants to move out. Even modest increases sometimes strike a nerve. By including automatic increases in the lease, you avoid the need to address the issue with your tenant each year. In addition, by putting the increases in the lease, the tenant is aware of the rent adjustments when they sign the lease, so you establish from the start the expectation of modest, yearly rent increases.
5. Set leases to expire in the spring or summer: In most areas, it’s much easier to rent a residential property in the spring or summer than it is in the fall or winter. In all areas, trying to find a new tenant between Thanksgiving and Christmas is extremely difficult. We bought our first two properties at the same time just before Thanksgiving. (Rob: We have Mike to thank for that brain fart.) While one rented quickly, the other took more than two months to rent. We now try to set all leases to expire sometime between March and July.
6. Respond quickly to maintenance issues: There’s nothing fun about the call you get in August that the air conditioner is not working or that the roof is leaking. But how you respond to such a call could mean the difference between a long-term tenant and one that moves out when the lease expires. We try to respond to maintenance calls immediately, but in all cases within 24 hours. Timely responses can build a positive relationship with a tenant that may just keep them in the property for many years.
7. Require a 30 day notice, but renew at 60: All of our leases require the tenant to notify us 30 days in advance of the lease expiration if they intend to move. But we will always contact the tenant at least 60 days in advance to renew. Even if the tenant is moving, you can start early on finding a new tenant. We contacted a tenant earlier this year about 60 days before the lease expired and found out that they were moving. This allowed us to advertise the property well in advance, and we were able to find a new tenant to move in within a few days of the previous tenants moving out. Whatever notice period you put in your lease, make sure it complies with local landlord-tenant laws and regulations.
If you have other tips to minimize vacancy, please leave a comment telling us about them.