Pop the champagne! I recently celebrated my 10 year anniversary of being a landlord. There have been plenty of headaches along the way, but I realized everything is fixable with time, money, and compromise.
The one thing I’m very proud of is going 120 consecutive months without a single vacant month for my first rental. I’m on my fourth master tenant, and so far so good. The rent started off at $2,150 in June, 2005 and is now at $4,000 with this latest one year rental renewal. If all goes to hell, perhaps I can find a job as a rental property manager!
I also started renting out a single family home in June 2014 after purchasing my latest house. This rental has proved to be a challenge in its first year given the higher price point of the house, and the multiple roommate scenario. One had a dog who damaged several doors and cabinet sidings. One tenant needed to break the lease early for a job move. But in the end, it all worked out thanks to a lot of scrambling.
As a landlord on a quest to achieve financial freedom, your goal is to maximize rental income and minimize costs. One month of vacancy will cut your annual income by 8.4%. Two months of vacancy will cut your annual rental income by 17%. And if you’re at three months of vacancy or more per year, you might as well hang up your boots or hire a property manager because you are doing a piss poor job being a landlord!
As I discovered in my mortgage refinance rejection, banks ascribe a 25% discount to all rental income when calculating your debt to income ratio. In other words, banks have a default assumption that each landlord will on average, have three months of vacancy. Banks were crushed during the mortgage default crisis, hence it’s hard for anybody to blame banks for being so conservative. But if you’re reading this post, you won’t be any typical landlord. You will be a Financial Samurai landlord!
HOW TO MINIMIZE VACANCY RATES FOR RENTAL PROPERTIES
After spending a stressful 45 days trying to fill my house with new tenants after my previous tenants decided to break the lease early by 1.5 months, here are my tips for minimizing rental vacancy rates to zero.
1) There is no replacement for HUSTLE. For my single family rental, I hosted 15 open houses and another five private showings over a 45 day time period before I found some tenants. Each trip took about 2.5 hours because I had to go early, tidy up, do some light cleaning, turn on the lights, decorate what I could with area rugs, speak to prospective tenants, tidy everything up, and then drive home. That’s roughly 45 hours worth of work. I could have been lazy and just showed the house once a week. Instead, I hosted one or two open houses a week, and hosted many last minute private showings.
Getting your property rented out is a numbers game. Your goal is to get as many qualified people walking through your place as possible to get that one gem of a tenant who will pay your asking price. Let’s say the “rental interest rate” is 5%. To get five people willing to submit an application means you need 100 different parties walking through. It’s just like being a single guy at a bar. Talk to enough people and eventually one will say yes.
There is simply NO LUCK to hustling to find tenants. It’s hard work that is constantly filled with disappointment. There were no fewer than eight hopeful tenants I thought would be perfect for my house who ended up finding another place. It’s hard to not take rejection personally, especially if it’s a property you’ve personally enjoyed for many years. It’s just business. Remind yourself it’s a numbers game.
2) Publish on as many free websites as possible. The more you can get your listing out there, the higher the chance your rental will get rented. The best free site is Craigslist by far. Everything else, from livelovely.com to apartments.com were duds. It’s important to upload as many pictures as possible to make your listing stand out. Do research on the comparables to properly price your unit, and highlight all the details of the property.
One pro-tip is to include a map of where the property is and draw arrows to various bars, restaurants, shops, parks, libraries, playgrounds and so forth to help give people an idea of how awesome the location of your property is. People have a hard time visualizing things. The easier you make it, the greater the chance they’ll show interest.
Another obvious free marketing channel is social media. If you can get others to vouch for you as a landlord and promote your property, you’ll have much more interest. You’ll also get better tenants because nobody wants to disappoint or embarrass their friend who referred them to you.
3) Underprice by ~5%. After making your free advertisement look amazing, it’s time to properly price your unit to receive the most eyeballs possible. Never price your unit at a whole number e.g. $2,000, $2,500, $3,000, $4,000, etc. Instead always price at least $1 under e.g. $1,999, $2,485, $2,980, $3,985. There’s obviously the psychological illusion of greater value to the prospective tenant with such pricing strategy. Also importantly, the search options are always segmented in whole numbers. You want to make sure that when someone searches for a 2/2 at $4,000, your 2/2 listing actually shows up!
It’s much better to have a fantastic tenant who is self-sufficient, respectful and timely and pays a slightly lower rent than a tenant who is unreliable and pays full market rent. By underpricing your unit, you get a bigger option to choose from. Once you get the best person possible, your life as a landlord will be much easier. An appreciative tenant is a more respectful, self-sufficient tenant who will follow the house rules. They know that they are getting a deal, which is why they’ll also have a tendency to stay for longer and take care of your place.
4) Create a sense of urgency. Selling is a skill, and part of selling is to create FOMO (Fear Of Missing Out) in the prospect’s minds. You can create FOMO by creating a deadline for the last open house showing in your ad, highlighting how it’s best to look now before school gets out for summer or winter, and share stories of how awesome your place has been for previous inhabitants.
You can even pitch the merits of renting vs. buying in this bubbliscious property market. I’ve come across a ton of renters who find the purchase property market to be outrageous. They are annoyed, angry, dismayed by how expensive things are. If you can empathize with their situation, you’ll be able to better sway them to rent your place.
I’ve also noticed that a lot of people wait until the last minute to search for a place because house hunting isn’t a very fun process. I had very steady interest for the first four weeks until interest surged during the last five days before the first lease date. If you’re a bidder on eBay, tenant interest is similar to the bidding interest during the last hour.
5) Be responsive and attentive. When it’s tenant hunting time, I am the most attentive person there is. I set up a separate e-mail address which I constantly check and respond to inquiries within 30 minutes to an hour. By showing attentiveness, you demonstrate to prospective renters that you’ll be attentive if something needs fixing. People tend to do more business with people who they feel more comfortable with.
6) Build a good relationship with existing tenants. Tenants generally always feel a little bit bad when it’s time to terminate a lease, even though they may have given the appropriate 30 days heads up. As soon as you get the move out notification, ask the tenant to work with you on some open house dates. If you have a good relationship with your existing tenants, they will have no problem letting you show you place, even though their stuff is still there. Draw up a schedule so they know your plan, and politely send reminders one day in advance about the showing.
This 30 day window is really where your hustle comes into play. Your marketing and open house showing should start immediately. If you’ve got really good relationships with your tenants, see if you can ask them to give you a 45 day or 60 day heads up before move out. The longer, the better, obviously. The tenant generally wants to please you because their rental deposit is at stake. You did make sure to get a rental deposit equaling at least one month’s worth of rent right? Check your state’s maximum. In California, the maximum is two months of rent for a security deposit for an unfurnished property for example.
7) Coordinate moving dates well in advance. When I bought my latest house in 2014, I moved out of my now rental from 9am – 1pm. I then drove back to make sure the house was in great condition by doing some last minute cleaning before my new tenants started moving in at 2:30pm. By planning meticulously, you won’t even miss a day of rent.
In my most recent rental, I coordinated my previous tenants move out on Thursday, April 30 to do the exit walk through and return their rental deposit minus an agreed upon early lease termination fee. That same evening, I had my newest tenants arrive for their walk through. Once again, not a day of rental income went to waste.
8) Ask for as big of a security deposit as possible. A large rental deposit is a landlord’s biggest asset in the tenant / landlord relationship. Not only does a rental deposit help keep a lid on damaging activity in the house, a rental deposit also makes tenants more agreeable upon move out.
When my tenants decided to break the lease by 1.5 months, that would be $13,350 in lost rent if I could not find a replacement. (The original lease was actually for 24 months, but I was nice and held them to 12 months instead for me to find replacements or have them pay the remaining balance). Their decision to break the lease forced me to work 45 more hours than I needed to if they followed our agreement.
After three weeks of house showing and cleaning, I told them the chances for finding their replacement for the beginning of the next month was slim and they could either fulfill the lease, or buy it out for $6,500. Given I had a $15,000 rental deposit, they agreed to me taking the $6,500 out of the rental deposit. If they had to write an extra $6,500 check, that might have been much more difficult for them. The $6,500 is not free money. It’s compensation for the 45 hours of extra work I had to do because of them.
Having a large rental deposit also makes requesting to show the house and asking for tenants to clean up much easier. Tenants will be less inclined to be difficult when a larger amount of money is at stake. A good practice is to ask for two months worth of rent as a deposit plus the first month’s rent upon move in.
BE A GOOD LANDLORD
By spending a lot of time screening tenants, you should be able to increase your chances of having great custodians who are responsible, clean, and timely with their payments. Having a solid ongoing relationship helps with any type of transition.
Think about your tenants as business clients. Treat your clients with the best service and they will want to help you find replacements when it’s time for them to leave. Landlording is a relationship business. The more you can make people feel good about their rental situation, the more money you’ll make, and the less hassle you’ll experience.
Remember, one month of vacancy will cut your annual rental income by 8.4%. Two months of vacancy will cut your annual rental income by 17%. If you’ve made enough money or can’t be bothered with trying to find and deal with clients, then consider hiring a well-recommended property manager for one month’s rent a year. If after all your efforts, your property still isn’t renting, then it’s clear you’ve priced the property too high.
Look into real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property or don’t want to tie up your liquidity in physical real estate, take a look at RealtyShares, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. Sign up and take a look at all the residential and commercial investment opportunities around the country Realtyshares has to offer. It’s free to look and discover.
Shop around for a mortgage: Mortgage rates have collapsed after Brexit, and US assets are aggressively being bought by foreigners due to our relative stability. Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible. This is exactly what I did to lock in a 2.375% 5/1 ARM for my latest refinance. For those looking to purchase property, the same thing is in order. If you’ve found a good deal, can afford the payments, and plan to own the property for 10+ years, I’d get neutral inflation and take advantage of the low rates.
Updated for 2017 and beyond.