Pop the champagne! I recently celebrated my 16-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. To celebrate, let me teach you how to minimize tenant vacancy for maximum rental income.
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.
Owning Rental Properties For Financial Freedom
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 Tenant Vacancy And Maximize Rental Income
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. As a result, they’ll 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.
Related: The Case For Buying More Rental Properties Post-Pandemic
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.
Tenant turnover will increase if they constantly feel the landlord is being unresponsive.
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.
The better your relationship with your tenant, the better the tenant will feel about staying. The better the tenant feels about staying, the more you can minimize tenant vacancy.
7) Coordinate moving dates well in advance.
Coordinating move-in and move-out dates is huge for to help minimize tenant vacancy. Every day there is not tenant is one day lost in rent.
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) Have a rock solid rental lease agreement.
Here is an example of a rental lease agreement I’ve used for 15 10 years. I’ve kept improving it to make it better and better. There is a natural tendency to make handshake agreements. But trust me when I say that you must put everything and every potential scenario as clearly in writing as possible. Memories fade and disputes happen all the time. To help minimize tenant vacancy, you need to be upfront with your tenants.
9) 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 To Minimize Tenant Vacancy
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.
Be A Strategic Real Estate Investor
If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, my favorite real estate crowdsourcing platforms today. It takes work to minimize tenant vacancy, but not if you are an investor with Fundrise.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns.
Sign up and take a look at all the commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
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Mr. Enchumbao says
Thanks for these tips. I didn’t think of the underpricing by 5% strategy before.
I have been a landlord for over thirty five years and could tell you all some great stories but I will give you one of my tips.
Add a weekly cleaner to the lease then you have the cleaner report to you regarding the tenant.
Deepak Tickoo says
I am thinking of investing in out of town rentals but am worried about property managers jacking up the maintenance expenses since they will be knowing I am not around to check it. Any tips on how to check that?
I have been an apartment landlord for 5 years now, and I had one change of tenant at year 3, with 2 weeks vacancy, and I thought that was pretty good given it was my second time soliciting tenants. Feels like I should’ve done better.
When I raised rent at the last renewal, as a goodwill toward my tenant (already established good tenant), I didn’t ask for additional security deposit to make the one month’s worth. Is that a good idea or not?
Even Steven says
I agree on your Always be Hustling, only thing I would add to that is consider setting up an open house of sorts for a day and schedule all of your appointments together so you can alert the current tenant to be out that day or suggest in advance this to occur. This worked out really well having 30 minute time slots for each person, this way it wasn’t as big of a deal if someone didn’t show up or ran over on time to show the competition coming through the door.
I would also don’t be afraid to shoot them an email, text, letter asking them how everything is going or if there is anything that can be done that requires your attention. This will keep a happy tenant, just be ready to attend to any serious issues that arise. My thoughts are I’d rather deal with it today than later so I prefer knowing today.
Really good though FS, I think you hit everything square on the nail. Might print this out come August as a reminder;) if they plan to leave that is.
Financial Samurai says
I did my best to get prospective tenants to come on certain days to visit for more efficiency, but so often they couldn’t for whatever reason.
It’s a competition to try and hustle for the right tenant, to not spending so much time as to waste your time.
My open house windows were 1 hour long, and sometimes would expand to 1.5 hours. It may have been good to set up 30 min private meetings back to back for 3-4 hours, but it’s hard to coral everybody.
Excellent results with your real estate in SF Bay Area!
I too have seen the benefit of the putting out some “Hustle” (for a passive investment no less) in the bay area and in the state of Colorado for our properties. The real work is done up front to get the best tenants you can and quickly. Properties that are vacant, not only lose rent that cannot be made up, but incur the on going carrying costs and utilities.
I used to enjoy high occupancy rates until I moved and needed to hire a property manager. Now we are in the 85% to 95% range.
Wow congrats on 10 years! That’s awesome! It certainly takes a lot of hustle and smart decisions to be a landlord. I met a guy the other day who only lasted one year as a landlord. He couldn’t take the stress and the hassles. He probably could have just hired a property manager, but he threw in the towel. Managing existing and prospective tenants is crazy time-consuming if you do it yourself and have to deal with a lot of people, HOA folks, etc. Excellent list and props to you for getting through 10 years and doing so well with your rental properties!
Great tips, Sam! I agree about underpricing a little bit. That seems to open the door to more potential renters. We have two nice rental families right now – one is the dream rental family. They fertilize and edge the yard on their own and keep the house in better shape than when we lived in it. I haven’t raised their rent in I think 3 years.
Financial Samurai says
A dream tenant is a dream come true. The dream tenant not only pays on time, but TAKES CARE of the place and makes it better. I wouldn’t raise the rent either with such tenants. Maybe once every 3-5 years.
“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”
I wonder why people call Real Estate a source of “Passive Income”. LOL
Financial Samurai says
Glad I’ve made you laugh! For me, once you hustle during the change over, you get to free up time to do anything else for on average 2.5 years in my land-lording history.
These 45 days were my TOUGHEST hustle yet because this was the first change over of my house between master tenant #1 and master tenant #2. I’ve learned from the experience and the next time should be more efficient. That’s the key, learning and getting better. I felt I needed to MAX HUSTLE b/c this property generates over $100,000 a year in income. If it was generating less than $50,000, I probably wouldn’t hustle as much.
Check out: Ranking The Best Passive Income Streams, which has “passiveness” as one factor.
Know your market for advertising is critical. Craigslist is good almost everywhere. In some areas, apartments.com may be the hot site. In others it’s For Rent.
Also I’ve been in the business 14 years and am still hesitant when someone comes to me and says they need an apartment right away. That was a red flag in Colorado. In DC, that’s pretty much the rental market works. People panic because they can’t find something and oftentimes, landlords don’t post until the unit is ready to be leased.
Sam… Any quick resources to determine “market rate” …? Or just the old fashioned poring over the classifieds?
Unrelated: I’m in SF next couple days… Casual dinner spot recommendations in north end??
Or, hire a property management company. You quote a lot of big numbers here but leave out a very important one: the value of your time. I certainly applaud your hard work and effort, but for me personally the the small percentage my property management company charges is without any question more than worth the trade-off. Obviously people have drastically different opinions on this topic but if you’re counting income w/o deducting your time as an expense, then you’re simply not painting a complete financial picture IMO.
Financial Samurai says
True, which is why I charged $6,500 for them breaking the lease 1.5 months early. The rate comes to about $150 an hour of my time spent finding a new tenant. It’s not my consulting rate, but it is OK as I’m working on finding value for my own property, not someone else’s organization.
Landlords must charge for their time, whether it be a separate line item or baked into their rent and their forecasted time spent to manage the place.
I underestimated my time needing to find new tenants by about 10-15 hours. But my housemate price point is much higher than my condo. Lesson learned.
Alexander @ Cash Flow Diaries says
A 2/2 for $4000 per month!! Holy cow that is amazing! That San Fran market is nuts, those tenants must have some super silly high paying jobs.
One thing I wanted to add for you is that if you use a site like postlets or rentlinx, you can create one rental ad and they will push it out to multiple sites for free including craiglist, zillow and trulia. It saves a ton of time and they are HTML ads so they can look pretty if you do it properly. I used it on my last rental and it also shows you where the hits are coming from. For my market the 2 most active were craigslist and trulia.
Financial Samurai says
Good tip on postlets. I’ve just found every other site to be useless compared to CL.
$4,000 is actually about $200 – $250 below market now, and my tenants know this. There’s no more mortgage either, so this one is a good income producer.
Debt free Dan says
I used postlets for my most recent rental (4/2.5 near Austin, TX). I got most leads from Zillow, Trulia, and then Hot Ads. Of course, not every caller identified their source (the former were all email leads, some of whom called me as well). I also had a sign in the yard. I’m expecting to sign the new lease tomorrow.
Financial Samurai says
Best of luck w/ the new tenant!
Honestly charging $4,000 per month for a property that has a market value of about a million dollars seems like a great deal for a tenant.
Financial Samurai says
Indeed. I price about 10% below market. The market here is rising number rapidly, and I’m falling behind!
Definitely agree on pricing below market. The one caveat is you never know how good a tenant is until they’re in the unit a few months. For this reason, when I rent, I price at the low/mid range so I’m not dealing with a pool of only cash-poor prospects, but once I find a good tenant, I keep the rent increases low and price it under market to keep them in.
I’ve talked with some great tenants who only look at high priced units because they don’t want to deal with the hassles of low rent units. It doesn’t make sense to me, but be aware the initial price is less important than how you treat a good tenant once you find them.
Financial Samurai says
True. Every choice is a leap of faith. We can only do so much to analyze the person before signing the lease. So far, things have been good, and SF is a small town. Social capital is important.
You should post a disclaimer that these results are not typical! 120 months straight is very impressive. I think treating people fairly and offering them a great value is a big part of your success. Congrats!
Financial Samurai says
I wonder what is a typical vacancy rate over a 5 and 10 year period. I’ll find out.
In 10 years, we had a crazy financial crisis. Yet the tenants remained and the rent was sticky (didn’t go down) due to the lease agreement. Perhaps this is another reason why I prefer property to stocks. Less volatility and greater income potential on average.
Marcus Boehler says
In my market, we have a large state university. A lot of the local REIN investors have 3/2 single families with more than one tenant. (college kids)
However, they structure the lease so that any one person is always liable for the full rent. This puts the incentive on them to find replacement roommates to keep the payment down. I had one local investor tell me they have occupied homes for 5 years before turnover. And if anyone ever moves out, they always manage to find someone to replace because they don’t want that extra bill each month.
But that may not be possible in your market…just sharing other successes. I can see one downfall is having less control in vetting the other prospective tenants.
Congrats on the 120 months. That is amazing. Great advice. It mirrors what an old guru, John Schaub says as well. So reinforces the soundness of the advice for me. We bought our second home and are moving now and converting current residence to our first rental.
Seems sorta risky. What if the new roommate is a bad egg and ruins the place. The person liable would be in trouble for another person’s mess.
I absolutely agree that there is no substitute for hustle – makes perfect sense for you to put that at #1.
When you were working longer hours, how were you able to show a house as often as needed to get a new tenant in? Did you ever consider a property management company for those points in your life where your non-productive time was minimal?
Financial Samurai says
I made sure to do everything I wrote in my post by developing a good relationship by being attentive to my tenant’s needs.
I’d host an open house after work at 7pm, and then one on Saturday or Sunday for the 30 day window once my tenant’s gave me a heads up. Thankfully, everything has worked out fine, although dealing with the Condo association’s move-in/move-out rules have caused problems before. I’ll probably write an HOA PITA post one day.
It helps that the condo is a 2/2 in a prime location. What also helps is a solid lease, which I’ll publish an example of in the near future for people to use.
John C @ Action Economics says
I love the idea of making local map with arrows from the house to show how convenient different local hot spots are. I fully agree that it is much better to have a great tenant paying a bit less than a sub-par tenant paying market rate. With my last renter experience I would have gladly taken a 10% cut in rent for a better tenant. When his term was up I ended up spending a day helping him move in order to expedite getting our new tenant in.
Financial Samurai says
I wonder about something post a sub-optimal tenant…. do you give an honest assessment to the future landlord? Or do you say the tenant is great so your tenant can actually find somewhere else, without feeling bad about the future landlord’s potential problem? Hmmmmm!
John C @ Action Economics says
I wouldn’t mislead a reference call on a bad tenant I would hate to be the guy on the other end lol! Luckily for both myself and my former tenant he was moving in with a family member after leaving our rental unit.
That is an INSANE rent increase over a ten year period. Certain parts of Brooklyn have gone up really fast, but I don’t think it went up as fast as your area of San Francisco.
With such crazy rent increases, did it almost pay off to have people leave sometimes? A vacancy could become a blessing in disguise…
Financial Samurai says
Although an 86% increase over 10 years is good, it has merely tracked the rate of property value increase. In other words, it’s not really outperforming a real estate investor who is looking to flip properties.
86% over 10 years is also only about a 6.3% annual compounded growth rate, if my math is correct. Not bad given the 10-year yield has been under 2.5%, but not incredible. But, with the use of leverage, and OPM (other people’s money) to pay down principal, it works out well.
Just got to HANGN ON for as long as possible before you can’t take being a landlord anymore. Being on the right side of inflation is a good idea.
It does pay off to have tenants leave in order to reach market rent. But, turnover is a PITA. The ideal tenant duration is probably around 3 years. Long enough so it’s not a pain, and short enough so rents don’t fall too far behind the market in a rising market. But, I don’t mind having a great 10 year tenant either who is self-sufficient.
I don’t know if it’s legal in SF, but where I come from it is also a very common practice to place fake ads on rental boards to pump the prices up before you publish your real ad at a significantly lower rate.
A friend of mine practices this to the max: he has 5 different phones with a different pre-paid sim card he uses for his ads. once people call the fake ads, he answers with “sorry buddy, it’s already taken!”.
This literally drives people into PANIC. Once they call in for his real ad, they are like cuddly puppies!
Financial Samurai says
Interesting strategy, and clearly illegal and dishonorable. But, I’m sure it happens all the damn time unfortunately. I’ve noticed there’s also a lot of competition from vacation rental ads. I put my Lake Tahoe condo up on Craigslist all the time, and it gets flagged by competing Lake Tahoe condo listings even though it’s totally legit.
Tough world out there. Got to HUSTLE!
The idea of creating FOMO is the same. Just got to do so in more respectable ways.
Great post as usual. We’re purchasing a vacation property water front which we plan to use like your Tahoe place (ie short term rental while we’re not using it). Any resources you’d recommend for info on how-to maximize rental income from that kind of scenario? It’s obviously different than a residence in SF. Alternatively, might I suggest it as a future post idea. Thanks.
Financial Samurai says
Hi Richie – Are you 100% going to proceed with buying a vacation property? I’ve got a post in the queue discussing my thoughts on the downsides of vacation property ownership.
I use a property manager who does everything for minimal headache. It just costs more money.
It’s on the water (Gulf of Mexico in Texas). While there are some nearby employers who rent long term, the area rental market is for short term water lovers, fisherman, families and the like. We haven’t closed yet (which is good as I saw there is a possible tropical storm forming in the gulf), but we will close end of the month. So I’m 100% going to buy. It’s waterfront great location and less than $200/sq ft which is well below market so it will appreciate over time. I’d love to rent it some and use OPM to offset my out of pocket. We’re considering the prop mgr route too but wasn’t sure if it’s worth the cost vs DIY. We only live an hour drive away but have no experience as landlords so looking for any advice we can get. Thanks.
That’s a crazy strategy, but I am not sure how it could be illegal. I have a friend who makes fake calls from various phones to low ball individuals selling cars before he goes in for the kill; and he’s a cop. I just don’t have those kind of street smart hustle perspectives.
I called about a house in my neighborhood once and the guy said “sorry buddy, it went under contract in 12 hours but call on Monday to see if the buyer doesn’t back out”. Three weeks later it was listed by a real estate agent at 10% less. I thought that it probably didn’t appraise but now I am suspicious as to whether or not the turn down was just a sales tactic. Pretty shrewd if it was.
Your buddy is a straight up DIRTBAG