Time is Money: Appreciating the Costs of Vacancies
As most investors know all too well, the costs of vacancies are high when rental properties have no tenant, and landlords lose money. While some periods of vacancy are inevitable, for example when a property is first acquired, a lease ends, a tenant breaks a lease, or a tenant is evicted, landlords should do everything possible to minimize these periods of vacancies.
Appreciating the true costs of vacancies can serve as a strong motivator for landlords and can help them reduce these periods through improved processes for finding and screening tenants, turning over properties, and completing necessary maintenance.
What is the Real Cost of Vacancies?
Obviously, the longer a property is vacant, the more expensive the vacancy becomes. However, thinking about the cost of vacancies on a weekly and even a daily basis can help highlight the day-to-day costs of a vacancy. For example, when a property with a rental income of $1000 per month is vacant, it costs the landlord approximately $250 per week and $33 per day.
Another way to think of this loss is in terms of the effective reduction in monthly rental income that vacancies cause. For example, at $1,000 per month, a rental property should produce $12,000 in annual income. However, if the property is vacant for one month, it will only produce $11,000, which is the equivalent of producing $916 per month. Similarly, if it’s vacant for two months, it will only produce $10,000 annually or approximately $833 per month.
In addition to the lost income, it’s important for landlords to keep in mind that they will still be responsible for holding costs even when properties are vacant. And, in addition to the standard holding costs of taxes, insurance, and, if applicable, mortgage payments, landlords will also need to pay utility costs during vacancies.
Finally, on top of lost income and increased holding costs, vacant properties generally require more time from landlords or property managers. When a property is vacant, landlords have to ensure that the property is secured and kept in good condition. In most cases, vacant properties also require additional time from landlords or property managers to get the property marketed and to find new tenants.
Why Does Understanding Vacancy Costs Matter?
All of these costs add up, making vacancies more expensive than landlords often appreciate. However, understanding the true costs of vacancies can help landlords both budget for inevitable vacancy periods and create practices that minimize vacancies.
The reality for landlords is that some periods of vacancy is inevitable. However, investors should understand the costs of these periods from the outset, price their units to help cover reasonable periods of vacancy, and work to develop systems to limit vacancies.
What Can Landlords Do to Minimize Vacancies?
One of the best things landlords can do to minimize vacancies is to develop good tenant screening processes. Doing so will ensure that you find reliable and steady tenants that will meet lease terms. A good screening process is by far the best way to find stable, long-term tenants.
In addition to good screening procedures, landlords should create systems that make tenant turnover as smooth as possible. Even the best tenants will move out at some point, so it’s important to have efficient systems for turnover. These should include having marketing plans in place to quickly attract quality tenants as well as having smooth systems for move out, turnover maintenance, and move in.
Finally, establishing good landlord-tenant relationships will help to reduce turnover and vacancies. Landlords can help build strong relationships with good communication, timely responses to tenant needs, and adequate property maintenance.
In addition to these proactive steps to reduce vacancies, there are some things landlords can do to reduce the length of vacancies once they occur. Some factors that can shorten the time it takes to find a good tenant include pricing the property competitively, allowing pets, ensuring that the property has good curb appeal, and thoroughly advertising the property.
Conclusion about the Costs of Vacancies
Vacancies are often more expensive than landlords appreciate. And, while some periods of vacancies should be anticipated, landlords should work to limit those as much as possible. Doing so will lead to increased rental income and reduced stress for landlords.
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