One will often here my reference to the term: “Slow the Turn”. What I’m vaguely referring to is one’s ability to slow the outflow of cash on expenses from a pure business/investment (heck -even personal lifestyle viewpoint too) perspective. As a Landlord, it is imperative that a real estate investor create an environment for their rental property portfolio that “Slows The Turn” with tenant turnover. Tenant turnover is an often a misunderstood expense that at a minimum creates a drag on your investment return (thus: delay on retirement or lowered cash-flow), high anxiety with managing the rentals, and at worst -the possibility of the loss.
As real estate investors, we all have different styles, desires, and theories as to what type of housing (sfh, duplex, townhome/condo, apts.), different social-demographics (low/high income, college/senior housing, SRO, boarding houses), and opinions of amenities to which we cater. What matters is that we all most focus on what will help decrease our expenses with running our rental properties for maximum satisfaction both personally (for mental health) and financially. When you analyze that, you’ll realize that the greatest expense is ‘tenant turnover’. I realized that once I can convert a one year tenant to 2, 3, 5, 10, 15+ year tenant that I can really grow my rental returns exponentially higher.
Think about it!
Every time a tenant moves out -what happens? You still have to make that mortgage payment. No rent (and for how long?). You need to pay to paint, carpet, and miscellaneous others expenses. Risk of vandalism to the vacancy. Marketing expenses. Time out of your day. Another issue to occupy your mental energy. Whether you do the work yourself or hire it all out, at a minimum , we all experience some level of cost both mentally, time, and financially to handling each and every rental vacancy. If I spend $500 mortgage payment and say $1500 in turnover expenses for a total of $2,000 that has to flow out of my pocket, it costs me more in reality. Know how I look at it? I have to take $2k out of my wallet to pay the expenses (outflow). Now I have $2k less to go elsewhere (such as another investment or personal lifestyle) -thus, a $4,000 swing or cost. Did you get that!?! I spend $2k and now have $2k less (to use elsewhere) and if I have to spend $2k elsewhere it really does cost me $4k.
Scary huh? Especially if you multiply that by 2, 5, 15+ rentals and not just one but 2, 3, 5+ months of vacancy.
So what do I do to “Slow the Turn”?
- Target Marketing for Vacancies
- Screen for My Ideal Tenant
- Improve Durability of Rental Property
- Customer Service -Do it right the first time
- Reward Long-Term Tenants
Years ago when I discovered my ideal tenant (at least for me) was the ‘creative loafer’, I had small 1 & 2 bedroom units in older historic area’s that attracted the 20-30 year old crowd on a budget. Most of the time space was not available for individual washer & dryers. No offense -but do you think this crowd was comfortable (nor wanted) with going down to a corner coin laundry? Not on your life! Charlotte, NC is not a high density city where this might be more ‘the norm’ for higher social-economic people. Do you think this would make it harder to fill a rental and a hurdle that just a common rent reduction may not overcome without changing my tenant target market? Absolutely. Solution -I put in stack washer/dryers. It was a hit and is a block in the foundation of ’slowing the turn’ with my smaller rental units to this day.
Do you have that 2-story (2,000 Sq/Ft) rental home I may refer to as ‘a sea of carpet & paint’. Carpet & paint can absolutely cripple your financial health if tenant turnovers are frequent. What might one do? Here’s a counter-intuitive idea. Maybe your ideal tenant doesn’t have a 680+ credit score. You say: “what your crazy Tyler”! Think about it. These residents have greater financial flexibility to do what they want (if even on a whim). In this 24/7/365 days of expecting it now, they will likely move more often (as a generalization) and/or buy that home sooner. Focusing on a family that’s gone through a bankruptcy, foreclosure, or divorce is certainly an angle; however, one must fine tune their credit screening to maximize success. Looking at tenants with a 575 to 679 FICO is a target market. Focus on length of employment, debt to income levels (for free cash-flow), bad debt, and eviction records. You see there are good residents in this pool of people. Tweaking your marketing and screening to finding the best of the best who maybe apt to staying in your home 2, 3, 5, 10+ years are the one’s whom are going to accelerate your wealth and lesson your mental anxiety (that so often is a cause of landlord burnout).
I’ve only highlighted two ideas towards slowing the turn. I would suggest your reading some of my other articles (such as: “Improve Your Odds” or “A Good Investment”), posting questions, or continuing to listen to future thoughts. Slowing the Turn with tenant turnover is key to improving the odds of your success with residential rental investment property. Think about it -especially during these times of high vacancy rates and rental pricing difficulties. Seek ideas that would work for your rental portfolio. Ask questions. Education. Networking with other landlords are opportunities to discovering solutions that will magnify your success.
Tyler McCracken – A NC Real Estate Investor
August 14th, 2010