Other than perhaps property taxes, turnover is generally the biggest single operating expense you will endure as a buy-and-hold real estate investor.And unlike property taxes, it’s something you have a lot of control over.
Getting turnover right can both increase your income and reduce expenses. It can quite literally make or break your ability to have positive cash flow.
First and foremost, the idea that tenants renewing their lease or moving out is something you can’t control is a myth. Sure, you can’t control it, but you can definitely influence it.
The goal here is to move the dial and increase the likelihood a tenant will renew their lease.The law of large numbers states that if you can increase the likelihood of a renewal of any given tenant over time with enough tenants, you will increase your renewal rate substantially.
Sure, if they get a job out of town, they’re going to move out. But if they are moving because of too many maintenance issues, that’s something you can (or at least could have) fixed.
Think of it this way: Let’s say your average vacancy is two months between tenants (turnover and time to lease). If you have a move-out every year, that would amount to a vacancy percentage of 14.3%; two divided by 14 (12 months tenancy, plus the two vacant months). Right off the bat, you increase your income by over 7% and reduce expenses to boot.
If you can bump that up to two years, vacancy halves all the way down to 7.7% (2 divided by 26). At three, it’s down to 5.3%, etc.
The most important thing to keep in mind is that fast, quality maintenance and good communication are by far the best forms of customer service a property manager can provide. And yes, you should think of your tenants as customers or clients. Think of quality maintenance as a tenant retention strategy.
You should also be proactive in seeking to get a tenant to renew. In the past, we have offered “lock-in” rental rates for renewing six months in advance. (This is when we had a glut of rehabs and didn’t want to add any more to our plate.)
Nowadays, we reach out to the tenant two months before the lease is set to renew with the new lease price and ask if they intend to stay. If they say no, we ask why, and occasionally, we can sway them if there had been a misunderstanding—for example, a lingering maintenance issue that hasn’t been addressed and they didn’t bother to call about.
We don’t have time for a deep dive on lease renewals, but it’s definitely worth picking up a copy of Jeffrey Taylor’s The Landlord’s Survival Guide, which has all sorts of tips on getting tenants to renew. The average tenancy in the United States is about three years. Ours are between four and five. His is over six.
If nothing else, offering a small reward like a gift card to their favorite restaurant (ask when they initially sign the lease) helps. Robert Cialdini notes that creating a sense of reciprocation is one of the best sales tactics out there, even if the items being reciprocated aren’t anywhere near equal in value (like a 12-month lease versus a $25 gift card, for example).
Keep reading other bits of knowledge from our team.
Have a question about this article or want to learn more?
