Investing in rental property isn’t for everyone. You need some capital, a certain degree of risk tolerance, and a willingness/ability to pay attention to the details. But ultimately, the formula for land lording success isn’t that complex. It looks a little something like this:
[Right Property] + [Right Rent] + [Right Tenant] + [Low Turnover] = Profitability
That’s four basic principles to generate positive cash flow. And while you can break each of these elements down into a dozen or more subtasks and responsibilities, let’s keep it simple for now.
On this blog, we have a ton of great resources to help you find the right investment properties, set the correct rent, and secure the best possible tenants. However, turnover isn’t something we spend a ton of time discussing. Yet, the truth of the matter is that higher turnover can be a big problem for certain landlords. More specifically, there’s the problem of elevated vacancy rates, which suppress cash flow and put landlords in perilous situations.
Traditionally, a vacancy rate is used to measure and analyze the percentage of units that are available in a hotel or apartment building at any given time. But it can also be used for landlords of single-family residences or small multi-family properties like duplexes and triplexes.
Calculating a vacancy rate is pretty simple. You just take the [# of Vacant Units] / [Total # of Units] and multiply that number by 12.
Let’s say you own one duplex, two triplexes, and five single-family homes. That gives you a total of 13 units. Now let’s assume that you average two vacant units per month. This means your vacancy rate is 15 percent.
Okay, but what does this mean?
Well, it tells you that, on average, 15 percent of your units are unoccupied at any given time. And if you know that the average vacancy rate in your market is 7 percent, it tells you that you’re experiencing more than twice the vacancies as everyone else. Something has to change!
If, on the other hand, you run your numbers and find that your vacancy rate is below 5 percent, this is in indication that you’re doing something right. Your primary focus is to study what you’re doing so that you can generate a formula for sustained success.
Your vacancy rate basically tells you how much money you’re leaving on the table over a given period of time. If you know that your average gross income per unit is $12,000 per year, a 15 percent vacancy rate means you’re only getting 85 percent of your maximum gross income. And if the average vacancy rate in the market is just 7 percent, this means you’re basically losing out on 8 percent of your potential income. In this example, that comes out to $12,480 per year.
Average vacancy rates vary from market to market, as well as from one property type to another. For example, a motel is going to experience much higher turnover and, therefore, faces a far greater risk of vacancies (particularly if it’s located in a small town or rural area). In a tight housing market, a duplex in the middle of a thriving city should have a very low vacancy rate – close to zero, in fact. So perspective is key here.
In most cases, high vacancy can be tied back to inflated rent, poorly maintained properties, bad location, and/or low incentives to rent.
High vacancy rates are frustrating, but you don’t have to put up with them indefinitely. With the right plan of attack, you can reduce your vacancy rate and maximize your gross income. Here are some helpful tips:
Determine a Fair Rent Price
There’s one sure-fire way to lower vacancy rates and keep tenants in your units: Set the right rent price. In a hot market like this, setting a rent price that’s at or just below market value will almost certainly lead to a tenant. (And assuming you ran the right numbers when purchasing the unit, you should have enough margin to remain cash flow positive.)
Make the Right Upgrades and Repairs
You have to treat tenants with dignity and understand that they have high expectations too. Just because they aren’t homeowners, doesn’t mean they don’t expect good living conditions. Safe and functional are the absolute baseline metrics. Your units need to be warm, inviting, and better than average. Make it your goal to reset the baseline average in your market. In doing so, the average fair rent price will eventually rise to reflect this new standard of living.
Incentivize Longer Leases
Every time a tenant leaves, you risk having a vacancy. The best way to reduce the risk of vacancy is to lower turnover. You can accomplish this by incentivizing longer leases.
If your average lease runs for just six months, you can lower your vacancy rate by increasing lease agreements to 12 months. This can be accomplished through a combination of lower rent prices, perks (like a free TV), and changes to your policies (like allowing pets).
Conduct Exit Interviews
It’s easy to assume that you know what’s going on, but never take anything for granted. Any time a tenant leaves or ends their lease, conduct an exit interview to find out what they liked and what can be improved.
We’re in the middle of a bustling housing market. And even though interest rates are low, home ownership is still unaffordable for a large percentage of the population. This means rental properties – including single-family and multi-family – are in high demand.
If you own rental properties in the Houston area and have a higher than average vacancy rate, you need to make a change.
At Green Residential, we help Houston-area landlords maximize profitability by offering white-glove property management services that address everything from tenant screening to rent collection to maintenance and repairs. Contact us today to learn more!
TREC Broker License # 9001367
CALL US