Dealing with Vacancies – The Silent Profit Killer
You work hard, you save up and you finally purchase that rental property you wanted as a long term investment, it should be all easy now right?
You build it (or purchase it) and they will come, except they don’t, and suddenly you have a vacant property that you’re paying for out of your own pocket!
Worse yet, if you’re like so many landlords out there you’re only making a hundred dollars cash flow after all your expenses are covered. That one month vacancy suddenly wipes out your entire profit for the year, if it drags out to two months you’re suddenly working for free for a couple years!
No one wants to work for free!
An Exercise In Math
Hopefully you have a good idea of what your expenses are for your property. Typically this will include a mortgage payment, taxes and insurance. Perhaps on top of that condominium or HOA fees, maybe even local recycling fees for renewable programs. Maybe you even include utilities (which is rarely a good choice btw, here’s an article explaining the pros and cons of including utilities).
Whatever that total number you come up with is your absolute break even number you have to cover each month. Why don’t you take a moment and try and figure out what that is, I’ll wait here…
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Got it? Well now let’s talk about what number Educated Landlords use.
They take that number and add another 5-10% for maintenance and another 5-10% for vacancies and that’s the REAL number they need to cover each month.
For maintenance if the property is recently fully renovated or new it will be closer to 5% or even less, for older more worn properties it will be closer to 10% or even higher. The vacancy rate is safest if you take the current local vacancy rate and double it, so if it’s 4% use 8%.
Currently our local vacancy rate is between 8-10% depending on which report you look at, I kind of put a ceiling at 10% since I seem to have minimal problems ever filling properties.
Bottom line whatever that number is, is what you need to cover each month, or worse what you lose each month it’s vacant.
I know, some folks will say you’re not really losing the extra percentages you tack on, but I disagree. If it was full you would have those coming in and flowing into a reserve fund to cover repairs and vacancies. Without it coming in, you still need to do ongoing maintenance and if it’s not flowing in to cover vacancies, it’s bleeding out to pay for the vacant space.
Look Hard At That Number
Whatever that number is, it’s important. It might be $1,000, it could be $1,500 perhaps it’s even higher, whatever it may be it’s coming directly out of your bank account, so don’t you think that should be a priority to fill it?
Yet I hear all the time from landlords that their property has been vacant for two months, four months or even longer. Ouch!
Big picture, if it’s taking you four months to fill a property (or after four months it’s still vacant), you need help.
What’s Your Problem?
You need to figure out your problem. Is your rent too high, is the property too ugly, did you pick a bad location or more commonly do you just have no idea how to market?
That last one seems to be the most common in my experience. Could it be your big problem?
If it is, I can probably help you.
But I’ll talk more about that in an coming post. For now, do soem of your math in preparation for the next post and we’ll do soem more landlord math again real soon!
Oh, one last thing. Could you leave me a comment and let me know the longest (or better yet the shortest) amount of time you’ve ever had a vacancy?
Great post, Bill. I have a house with two suites, upper and lower. My lower suite was vacant for over a year. I tried lowering the rent, providing incentives. In the end it turned out to be a number of things, the biggest one was a large downturn in the market. Thankfully the upper suite stayed rented and I didn’t bleed completely dry.
Hey Mark, thanks for the feedback.
Downturns can lead to a huge decline in potential tenants, but that doesn’t mean they are out there. You just need to be more creative (sometimes that involves incentives, but there are other methods as well) and patient.
Having said that, with a vacancy of over a year there are likely a few things you need to look at. With the money “lost” from that year period you could have taken a portion and possibly created some renovations to improve the draw or other tactics. Without seeing it and having all the facts I could be a bit off base, I just know that in down markets I tend to take longer to fill properties but that usually translates to 6-8 weeks versus the normal 2-4, but I do know a couple secrets 8′]
Bill
Very great points Bill! Know your number and make sure it includes vacancies. Great advice. Vacancies are easily my third largest expense right after Mortgage interest and property taxes for some properties.
My SFHs take longer than my condos. I generally have someone lined up for my condo before I’ve finished turning it over. My SFHs can take 2-3 months off season.
Great points as ever Bill! Many thanks.
The properties I self manage in my home town in Nova Scotia are rarely vacant for more than a week. Usually I have tenants lining up to move in before the last ones have even moved out. The story is completely different for my (townhouse) units in Edmonton. Most recently a unit was vacant for 3!!! months. I kept chasing the property managers to ascertain the problem, since I’d dropped the asking price for rent twice. They just kept saying it was a tough market for landlords at present. Hmmm.
Thanks Jan,
Lined up tenants are awesome, that is fantastic to hear. Although the longer wait because the market is tough is a bit of a copout for your property manager. I’m also in a tough market and my last vacancy took less than a month to fill (and honestly I didn’t work as hard as I should of) and another one I just started advertising last week in a small town (which typically is an even tougher market) already has four sets of potential tenants lined up to see it and I’m expecting it will be filled before the end of April or possibly within the first few days of April as one tenant already loves it.
Bill
Hey Domenick,
Glad to hear from you. You’re right not only are they taking away your profits, or cash flow, but they end up being an expense as well. Just one more reason you need to fill them as fast as possible!
Any thoughts on why your single families take longer? I’ll let you answer then provide my thoughts as well.
Bill
Simple market dynamics. The condos are in a major metro area and there is no shortage of prospective tenants. My SFHs are in the suburbs.
It just takes a little longer to find someone who is well qualified.
I can see that. IT’s better to sometimes wait to get the right tenant versus just filling a vacancy and paying for it later!
Bill