Tenant Turnover: Its Costs and What You Can Do to Minimize Them
In the multifamily real estate business, cash flow is king. That means one of a landlord’s highest priorities should be to keep occupancy rates as close to 100% as humanly possible. Anything less than that and cash flow will suffer.
That’s why tenant turnover is a silent killer.
Turnover happens when a tenant decides it’s time to move on and the landlord is left with an empty unit to fill. While this may not seem like a big deal at first, a month or two of lost income per unit, per property can quickly add up to significant vacancy losses.
Here are some of the specific ways in which tenant turnover costs landlords money:
As mentioned above, the most significant cost associated with tenant turnover is lost income. For however long it takes to find a new tenant, the landlord is stuck with an unproductive unit. Vacancy losses of this kind can drastically affect the bottom line.
Cleaning and Repair
Preparing a unit for new renters doesn’t just take time; it costs money as well. A couple hundred dollars spent on deep cleaning, fresh paint, and minor repairs will only intensify the economic pain caused by vacancy loss.
Marketing and Administrative Costs
Thanks to the internet, marketing is cheaper and easier than ever. Still, advertising takes some measure of time, money, and effort. On top of that, “hands-off” landlords will have to pay an on-site manager or agent to show these properties to prospective renters.
When a new renter is found, the landlord will also need to pay for tenant screening, background checks, and a credit report. Once again, this adds to the pain of turnover.
“How You Can Minimize Tenant Turnover”
Of course, there are ways to minimize each of the costs I mentioned above.
- To help with vacancy, you can (and should) line up new renters before your current tenants move out.
- To minimize repair costs, you can exact a healthy security deposit from new tenants and guard it jealously.
- To keep marketing and administrative costs down, you can rely on social media for advertising and find cheaper ways to screen tenants.
Still, each of those measures will only take you so far. If you really want to cut down on these expenses, you’ll need to treat the problem at its source: turnover itself.
That said, here are 5 ways to cut down on tenant turnover:
1. Due Diligence & Market Research
Before anything else, turnover is a function of property location. You can do everything right, but if your property is located near transitional housing in a less-than-desirable part of town, you can expect tenants to roll in and roll out frequently.
Investors can and do make a living serving areas with high turnover, but only because they’ve got the systems and scale to run an incredibly streamlined operation capable of turning over new tenants as quickly as possible.
If that’s not you right now, then focus on stable markets with low vacancy and strong employment prospects. In general, you’ll want to stay away from military towns and other areas that feature highly transient populations.
Caveat: College towns earn an exemption here. Given the regular rhythm of supply and demand, the benefits far outweigh the challenges of turnover—provided you set up the systems to keep turnover time to an absolute minimum.
2. Screen Your Tenants
If you want to hold down tenant turnover, focus on getting the ‘right’ people into your units. Who are the right people? At a minimum, they’re responsible adults with a proven track record of dependability both at home and at work.
To find these people, be sure to screen new applicants on both the financial (work history, income, checking/savings balances, etc.) and behavioral (tenant history, criminal record, etc.) aspects of their lives.
Never trust your gut. Always take the time to do the paperwork and find out exactly who you’re dealing with. You’ll often be surprised at what you find.
3. Offer Lease Incentives
A simple way to reduce turnover is to lock tenants into a longer-term lease. If you can get a renter to commit to 24-months, you’ll all but guarantee yourself two years of stable income with no vacancy loss during that time.
Of course, any lease longer than 12 months represents an added commitment on the renter’s part. They’ll rightly want to be compensated for that. Be prepared, then, to incentivize a longer lease either by way of a minor discount or unit/appliance upgrades.
4. Keep up Regular Maintenance
For a tenant, there’s nothing more frustrating than having your maintenance calls fall on deaf ears. As a landlord, it’s your responsibility to respond promptly to these requests and see to it that everything is in good working order. Not only will this keep your tenants satisfied, but it’ll minimize later expenses due to deferred maintenance.
Maintenance matters outside the unit as well. Your residents need to be able to take pride in the place where they live. They can’t do that if the front door is broken, the hall lights are out, and the common areas look like they haven’t been cleaned up since 1972.
Strive to create an environment people genuinely love to call home, and they’ll be more inclined to stick around at the end of their lease term.
5. Build Relationships
A successful real estate business is built on solid relationships with brokers, lender, other investors and, yes, even your tenants. Minimizing turnover greatly depends on the strength of your connection with your tenants.
This doesn’t mean you have to become best friends with every single one of your tenants. It does, however, mean you have to find intentional ways to create and cultivate these relationships.
This begins with screening and choosing quality people, setting clear expectations at the beginning, and promptly taking care of their needs.
“But, it doesn’t stop there.”
Find ways to go above and beyond for your residents. It may seem hokey, but I’ve known landlords to send out Christmas cards, deliver turkeys on Thanksgiving, and go from door to door handing out buckets of popcorn.
Little actions like this don’t cost you much, but go a long way in helping people want to keep living in a place, if for no other reason than the fact that you’re their landlord.
You won’t be able to prevent all tenant turnover. For 101 reasons you can’t control, people need to move. That’s fine. Don’t worry about the circumstances you can’t control.
Instead, pour your energy into the five areas I mentioned above, and you’ll find your tenant turnover numbers begin to improve dramatically over time.