There is no question about it. I have been delinquent in reporting results on No Basement, our latest property turnover. Sometime back, Rob wrote about our tenants moving out of this property and offered a promise, or threat as the case may be, to undertake the public humiliation of singing a little ditty for the TWA audience if I managed to find a tenant with no rent loss. I was torn then, as I am now, as to whether the challenge was motivating or hindering. Certainly, as a real estate investor, I want to minimize vacancy, yet as half of TWA, I would like to maintain our regular readers. Rob’s offer presented a clear conflict of interests.
It is with all regret, intermingled with relief, that I report that I did not rise to the task.
The Purchase and the Rehab of No Basement—A Recap
Rob and I bought our second investment property, dubbed No Basement here on TWA, in the Fall of 2005. No Basement is a 3 bedroom, 1 bath home built in 1991 a little shy of 1350 square feet. We bought the property from HUD at a good price, using our knowledge of HUD’s minimum acceptable bid. The rehab was more extensive than our other investment properties, including a full kitchen and half bath remodel. All in, our costs, including purchase, rehab, financing, and holding costs, were around $104,000, with total cash invested of $4000. After completing the reformation of No Basement, we rented the property in about 30 days. The property brought a base rent of $995 for a term of two years beginning January 1.
The Offering of No Basement
Fast forward to this last November–sixty days before the end of the lease. We contacted the first tenants, and they notified us that they were moving. So we were off to the races. We did our homework to determine current rents for comparable homes in the area and advertised the property on a rental website beginning in early November. We determined that market rents were in the range of $1000 to $1100, and offered No Basement at $1045 along with a lease-purchase option (we’ll get back to the lease-purchase part).
We had several early inquiries and our first showing in the first week of advertising the property. One of our first prospects to see the property even set a second appointment to complete a rental application. . . followed by a no-show. While I continued to show the property sporadically through the holiday season, the number and timing of showings were limited by the fact that the property was still occupied by our first tenants and by our prospects’, and my, holiday schedules.
The Taking of No Basement
By the end of December, I had shown No Basement on five occasions to about 10 prospects, and had taken, and rejected, three applications due to show stoppers that ranged from prior evictions to serial bad checks. The first tenants moved out a few days before the end of December, and we repainted, thoroughly cleaned, and did the miscellaneous repairs that always accompany a property turnover. We scheduled the first open house in early January and had ten prospects through the property in one day with one application the same day. After reviewing the applicant’s credit report, checking prior rental references, and verifying income, we approved the application for a lease-purchase with the lease beginning February 1. All in all, we lost a month’s rent.
What We (Mostly Rob) Did Wrong
I’ll start with the “wrong.” It’s simply this—we entered into our first lease for No Basement with an end date of December 31. Renting a property in the Winter isn’t great, but renting a property in the holiday season is worse. Even in an area that has a real Winter (and by real, I mean real bad), responses to rental ads pick up noticeably in January compared to November and December.
While we had no control over the start date of the lease since it was a newly acquired property, we may have been able to change the end date. While I believe it’s important to offer familiar options, which means one and two year leases, we could have approached our first tenants after they were approved, and offered to the option of setting a later end date. For the same reason that we don’t want a lease to end in November or December, neither will most tenants if given the option. People don’t like to move during the holidays. So, we’ll approach an approved tenant and explain that, while they’re approved for a two year lease, we find that most people would prefer to move in the Spring or, if they have children in school, at the end of the school year, so we offer the option of extending the lease with no rent increase for up to five months. By making it the tenant’s choice and by explaining it that way, many tenants will extend the lease to a time that’s easier for them to move and easier for us to find the next renter.
What We (Mostly I) Did Right
We have previously written about the importance of longer term leases to reduce turnover. No Basement was our second rental property, and while still feeling our way around the rental market and the terms that worked best for us, we were at least cognizant of the importance of longer term leases. Vacancy and turnover are the fastest way to drive up the cost of rental properties. There are always additional maintenance costs to make a property rent-ready and, no matter what time of year the property is offered, renting a property with zero vacancy, although we’ve done it, is still a challenge. A loss of one month’s rental at the end of a one-year lease translates into a vacancy rate of over 8%; a loss of one month’s rental at the end of a three year lease results in a vacancy rate of less than 3%.
With No Basement, our first tenants had a two year lease. With our new tenants, we have a three year lease. While, as before, we offered the property for a one and two-year lease term and provided the incentive of lower rent for the two-year term, we also offered the property for lease-purchase. By offering the purchase option, we created an additional incentive to renters who ultimately want to buy. Our new tenants took us up on the offer. As a result, we have a longer term tenant, with built in rent increases for each year of the lease, and potential buyers for the property.
With the re-renting of No Basement, we’ve improved cash flow and returns. But we may have been able to do even better by controlling, at the outset of the first lease, when the property would be re-rented. Not doing so may have cost us a month’s rent.
On the other hand, TWA’s regular readers have not been subjected to Rob’s warbling. While I wonder whether we would have made up for the loss of regular readers with search engine results, it’s simply difficult to predict how many people are searching for “sounds similar to nails across a chalkboard” and “mating calls of sub-Saharan hyenas.”
Splitting the difference, I’m going with Martha Stewart on this one and concluding “it’s a good thing.”
Image By: anyjazz65
