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The True Costs of Tenant Turnover

April 13, 2018

The High Cost of Tenant Turnover

In listening to landlords and property managers who don’t manage elite rental properties, you discover what makes tenant turnover a big issue.

The costs, extra work, extra phone calls, property visits, rental advertising, and financial transactions in downscale rental properties really mount up. If you’re renting in Miami, San DiegoSan Francisco, Dallas, Los Angeles, New York, or Washington DC, losses could be sizable.

These types of situations are plagued with high tenant turnover. However, sometimes high rent condos and homes experience occasional one month gaps in rent payments. That’s not uncommon if there are legal issues or well off tenants are hard to find.

The Costs are Almost Always Higher Than Expected

Although the mortgage payment on a property isn’t a loss technically, it’s still a cost you must cover. The actual cost of losing rent for one month on one unit can be $2,000 to $6,000, with most of it being lost rent. If the vacancy gets extended for several months, it would be significant financial burden.

When novice property managers get into their new landlord business, with 5 to 12 properties, they soon realize a big factor in success is the turnover of tenants. And as a landlord, you’re already contending with:

  • document processing
  • paper document retrieval
  • tenant issues
  • late payments
  • repairs and maintenance scheduling
  • paying bills
  • ensuring the owners are earning enough to pay you

When turnover gets bad, it shakes your confidence, raises stress, and makes you feel a property management business isn’t doable for small portfolios. It can ruin you financially.

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If you automate your property management duties, you can streamline quite a bit of the daily work. It’s a smart choice, however, it can’t help you recover revenue from lost tenants.

The Full Cost of Losing Tenants

In a recent post on how to reduce tenant turnover, we offered some interesting ways to reduce the incidence of lost tenants. We didn’t get into the financial aspects, so let’s do that now.

IssueCost
Mortgage$1,000.00
HOA Dues$350.00
Property Taxes$300.00
Listing advertising$75.00
Landlord/property manager time to advertise, show, interview, and acquire new tenant$360.00
Time taken to screen tenant and costs to check out tenant$40.00
Maintenance costs/cleaning$100.00
Lost Rent if Vacant$2,500.00
Total Opportunity Cost$4,725.00

 

If the total opportunity cost is $4725 per year per badly managed unit for 20 properties, the total cost might be as high as $90,000 per year. Wow, that could hurt any property owner or investor. And we aren’t talking about evictions and associated legal fees and your time wasted.

Numbers like these seem to justify hiring a professional property manager.  At 10% of rent, you might be paying anywhere from $20,000 to $60,000 per year on a 20 property portfolio. And you may not have ensured the property manager takes responsibility for any lost rent or tenant vacancy.

As a professional landlord, or novice landlord, do you guarantee the owner?

Tenant Guarantee from a Property Management Company

A Tenant Guarantee is an assurance that the tenant will meet the requirements of rental lease. If the tenant breaks the lease, gets evicted, or leaves, the property management company must fill the vacancy at their cost with no leasing fee charged again. 

The tenant guarantee does not normally cover the lost rent, return of property manager’s fee, and turnover costs. However, some property management firms do cover the lost rent, however they would be eager to take on a lower quality tenant just to get the unit rented.

Any property management company that offers this guarantee would want a higher service fee (since they reduce the risk for you and they offer a better level of service to you).

You’ll be asking whether a property management company’s tenant guarantee is pretentious promise, or a substantial benefit.

The best way to reduce your exposure to cash flow problems, extra work, lost revenue, and landlord fatigue is to screen carefully and make your rental unit as comfortable and desirable as possible.

In some buildings, neighborhoods, and cities, turnover is very difficult to reduce. You may want to screen for these low quality investments and steer clear of them.

A good property management firm might be a good option for you if you lack the expertise in selecting, screening and managing tenants, along with the everyday matter of property management. In this blog however, we’ve provided plenty of landlord tips and property investment strategies that help you do the work yourself and avoid trouble.

Try out a simple to learn and use property manager software solution for any  sized property portfolio. Find out why property management companies big and small use our software.

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