How Real Estate Investors Can Keep Vacancy Rates Low

How Real Estate Investors Can Keep Vacancy Rates Low

Real estate investors are gearing up for a chaotic leasing season, potentially with much higher vacancy rates due to coronavirus. Prepping units, advertising vacancies, showing apartments, and piles of paperwork can be stressful – and for good reason! A single month’s gap vacancy can eat away at a year’s worth of positive cash flow. 

Tenant turnover is an unavoidable part of real estate investing and comes with its own headaches. Costs are just the beginning. You have to manage all of these improvements, which usually means an array of contractors. Let’s say a tenant is vacating a unit after three years. You’ll probably need to get in there to do a professional cleaning. You may need to steam clean or replace carpeting altogether. It might be time for a new coat of paint, too. 

It’s tempting to take on this work yourself, but you have to balance that with the demand on your time. If it would take you three weeks to complete a turnover that a team of professionals contractors can button up in three days, it may be better to outsource the work. Remember: the longer a unit sits vacant, the more money you’re losing on your investment! Be an investor, not a contractor.

When you think about all that goes into tenant turnover, you start to realize just how valuable your existing tenants are and how critical a low vacancy rate is to your turnover. If you’re trying to keep vacancy rates low, start by focusing on renter retention. Some units will always turn over. By some estimates, 54% of apartments turn over every year. The goal is to keep that number as low as possible, keeping your occupancy rate high with vacancies as short as possible when they inevitably occur. 

Subscribe to the Financial Residency PodcastHow to Keep Tenants and Avoid Vacancy

All too often, landlords take their existing tenant base for granted. They assume tenants are happy and as a result, put customer service on the backburner. Unfortunately, that’s a fool’s errand. Renter retention is critically important for those who want to keep their vacancy rates low. Here are some tips to maintain your existing tenant base in any market:

    • Start renter retention efforts early in the lease cycle. Most people don’t make snap decisions about whether to renew their lease or not. Yet we often see landlords wait until the last minute – about a month or two before a lease is set to expire – to ask residents if they plan to stay for another year. At this point, any efforts you make to get those tenants to renew their leases might already be too late. Your retention efforts need to start much, much earlier.
    • Modernize your communication and payment systems. Today’s renters are more tech savvy than ever. They increasingly expect to be able to pay rent online. They want to communicate with their landlord or property manager via text, email or even social media. They value the convenience of tech-enabled smart home devices, from learning thermostats like Nest to keyless entry locks. Consider integrating more technology into both your business practice and individual units. These relatively small investments show residents that you care about them, and the property, which will increase their likelihood of staying another year.
    • Gather (and act on) resident feedback. Landlords often assume they know the ins and outs of each unit and each property. But until you’ve actually lived in a unit, you can’t really have a strong grasp of the little things that could be driving a resident crazy. Start surveying residents after they’ve lived in the unit for a few months. Ask if there are specific improvements that could make their experience better. Then, act! This shows residents that you genuinely care about their comfort. Small actions will go a long way in terms of renter retention and ultimately improve your return on investment. You may not mind that leaky faucet, but they do.
    • Make strategic investments in property upgrades. Depending on where you’re located, there’s a good chance that your area has experienced an influx of new real estate construction over the past 5-10 years. New multi-family apartment buildings seem to offer it all: pools, doggie daycares, bicycle repair stations, BBQ pits – you name it, they seem to have it!
    • You don’t have to complete amenity-for-amenity with new apartment complexes. Instead, consider making strategic upgrades to your real estate. Maybe it’s time to invest in new landscaping or an outdoor patio area for residents to gather. Or perhaps you can transform an unused basement area into a home for new storage lockers. Little investments, like garden beds, can amp up the appeal of your real estate without breaking the bank. The key here is to make investments that appeal to residents without drastically increasing rents, which could negate your other renter retention efforts. Not sure where to invest? See the point above regarding surveying residents! You might also consider doing a yearly inspection, or checking in with each tenant every six months, to gauge potential repairs and improvements.
    • Reward long-term tenants. If you’ve been fortunate to acquire the Holy Grail that is the long-term, rent-paying tenant, consider offering them some sort of reward to stay put. This might be a fresh coat of paint or professional carpet cleaning every two or three years. Or a light bathroom renovation. These improvements will go a long way to making a tenant feel appreciated while simultaneously adding value to your property and keeping vacancy low.
    • Level the incentive playing field. Owners will often use incentives to keep vacancy rates low. “One months’ free rent if you sign a lease today!” That can could lure some of your existing tenants away. So consider this: if YOU plan to offer incentives to new tenants as a way of lowering vacancy rates, consider offering a similar incentive to anyone who re-signs a lease this year. Perhaps it’s not as steep a discount; maybe it’s half-off one month’s rent. But if you’re advertising rent concessions to others, your existing tenants may feel slighted and start to think about moving. Either way, this helps to level the incentive playing field. You will lose a little income from the incentive.
    • Set reasonable rent escalations. Nothing will scare away an existing tenant faster than a major rent increase. Instead, focus on reasonable rent escalations – usually between 2-5% per year. To better set the rate, research websites like Rentometer, Zillow and HotPads to determine the going market rate in your area. Assuming you’re already in line with the market average, assume a “low and slow” mantra when renewing leases for existing tenants. If your real estate market is hit hard with coronavirus leading to lots of vacancies, this is not the year to hike the rent. Focus on keeping the vacancy rate low and hold off on a rent increase until the economy improves, rather than trying to maximize the rent at the risk of losing good tenants.
    • Lock in rental commitments now. Renters don’t usually make snap decisions about whether to renew their lease or not. They’ll typically poke around the market to see what else is available, weighing inventory against their current situation. Real estate investors want to get ahead of this search as soon as possible by locking in commitments early. If the industry in your area is trying to get renewals 60 or 90 days out, consider getting yours 90 to 120 days out instead. 

Physician Wealth ServicesWays to Improve Vacancy Rates Upon Turnover

Despite your finest renter retention efforts, units will inevitably turn over. It’s just a matter of time. People relocate for work, get married, have children – any number of factors can influence where a person decides to live. You can’t prevent turnover altogether, but you can mitigate the impact of turnover. Here are some strategies to improve vacancy rates at your rental properties and get your units rented fast:

    • Make a great first impression. Anyone who is trying to minimize vacancy will want to take steps to really “wow” potential tenants. There are a few ways to go about this. Start with the basics by focusing on cleanliness. In a multifamily, keep the common areas spotless. At a single-family rental, be sure it sparkles when showing to a new tenant. This extends into exterior maintenance. After all, the first thing a prospective will see is the exterior of the home when they pull up in the driveway. Be sure the lawn is freshly mowed, trees and shrubs are trimmed, fences are painted, the driveway is in good condition, etc.
    • Make some easy upgrades. Be honest with yourself: are the units you’re trying to lease a bit tired or outdated? Do they have shag carpet or original linoleum? YIKES! But don’t panic. There are usually many easy ways to upgrade apartments so they show better. Start by stripping and replacing outdated flooring. A coat of white paint and new hardware can easily give cabinets a more modern, fresh look. Swap out lighting fixtures to something more modern while you’re at it. These are easy upgrades that can be made in just a few days, but that will help present the vacant unit in a new light (no pun intended!).
    • Add a few amenities. If you’ve been considering adding a Nest thermostat or Ring doorbell, now’s the time to do it! Tenants, especially Millennials, love these added amenities. Landlords love that they don’t break the bank. Consider what other amenities you can offer. Maybe you throw in bi-weekly lawn mowing for your single-family rental properties (something that would be expected at a larger multifamily building). After all, tenants usually don’t want to take on responsibilities like these. Sure, that’s an added expense, but that expense can be factored into the rent. The more properties you have serviced, the lower this maintenance becomes.
    • Consider offering a rent discount. If you’re looking to fill a vacancy quickly, you might want to offer an incentive. For instance, you could offer 50% off first month’s rent for anyone who signs before a certain date (e.g., before December 31st). Your carrying costs will likely outweigh that concession if a unit sits vacant. Getting someone in the door with a temporary discount is better than not having anyone at all!
    • Throw in a few additional “sweeteners”. Big apartment communities tend to do this, but it’s something that smaller building owners can do too. Sweeteners – like free cable or a $250 gift certificate to a local supermarket or grocery store – can make or break it for someone who’s looking at your apartment vs. others in the area. You might even offer an incentive, like free movie tickets, to people just for viewing the property. Items like this can be very affordable if purchased in bulk.
    • Negotiate special deals with local businesses. One strategy to lower vacancy rates at your multifamily property is to negotiate special deals with local hair salons, pizza shops, and other small businesses. Many will gladly offer your tenants a special 10-15% discount in exchange for you advertising their business to residents. This requires a bit of legwork but is otherwise costs you nothing.
    • Prioritize customer service. When the phone rings, answer. When someone emails you, respond quickly. If someone has questions about your rental, get back to them with answers as quickly as possible. Enhanced communication will show prospects that you’re a reliable landlord, which bodes well for the future.
    • Consider flexible lease terms. Some landlords get hung up on using the standard, 12-month lease. But if you’re looking to fill a unit quickly, consider offering more flexible lease terms. Perhaps someone is moving to the area on a short-term job assignment and needs a 6-month lease. Or maybe a family is interested in moving to the area, and would feel more comfortable with an 18- or 24-month lease. As a general rule of thumb, stagger lease expirations and try to schedule expirations during peak leasing seasons (May through August). This will help you avoid off-season leasing next time around.
    • Try hosting an open house. People are busy. If you want to lease an apartment quickly, consider hosting an open house (or two – one on a weekend day, one on a week-night). This gives people an opportunity to tour the unit without having to set up individual appointments. Most people think open houses are only worthwhile when selling a home, but renters like the convenience of open houses, too.
    • Revamp your marketing strategy. Let’s say you’re trying to fill a 3-bedroom home. Three-bedroom units are often more difficult to fill than one- or two-bedroom units. Some people only search for the maximum number of bedrooms they need as a way of keeping costs down. So consider marketing your unit differently. In this case, instead of marketing the unit as a 3-bedroom, consider marketing it as a 2-bed plus office. This will help capture those looking for a 2-bedroom unit who might be enticed by having the third bedroom as an office (or nursery, fitness room, etc.
    • Be sure your online listings are complete. Many people fail to include highly pertinent information in their listing descriptions. Are utilities included? Is there on-site parking? Don’t put it on the prospect to track down information, particularly if you’re looking to improve vacancy rates. The more difficult you make it for a prospect to find this information, the less likely they are to ask for a showing.
    • Don’t lower your screening criteria. If you’re struggling to fill a vacant unit, it’s tempting to accept the first person who shows interest. This is a HUGE mistake that can be costly down the road. Keep your standards high when screening prospective tenants.

Keeping Vacancy Rates Low

There are many ways for owners of single-family and multifamily rental properties to lower their vacancy rates. These are just a few strategies—there are certainly others to consider. Whichever strategies you deploy, be sure they’re translating into the results you want: low vacancy rates with limited downtime when turnover inevitably occurs.

 

 

About the Author:

Dr. Cathy Carroll started her professional life in finance, after graduating from Smith College with a Bachelors’ in Economics and earning a Master’s in Global Financial Analysis from Bentley University. She started her Wall Street career at State Street Bank in accounting then transitioned to buy-side equity research for pension plans and mutual funds, working at Scudder Investments, GMO and Loomis Sayles. She then went on to earn the Chartered Financial Analyst® designation and join the CFA institute.

She next transitioned to medicine in 2006, graduating from medical school in 2010 at the University of California at Davis and completing an Internal Medicine residency at Santa Clara Valley Medical Center in San Jose in 2013. Dr. Carroll now practices medicine as a hospitalist in Southern California.

While still working in equity research, she started investing in real estate personally, buying her first duplex in the Boston area in 2001. She later expanded her investments to Las Vegas, Austin, Tennessee and Alabama. She continues to actively participate in real estate syndications, as well as owning multi-family and single family rentals in multiple states.

In her free time, she enjoys reading, gardening, making Excel spreadsheets, hunting for deals and traveling with her family.

Reach Cathy at: info@ryca.io

Cathy Carroll, MD, CFA