This past Spring was our first experience handling tenant turnover. And, like most novice real estate investors, it scared us. A lot.
If you’re an avid reader of this blog, you may already know us as the couple that bought three homes in one day on Roofstock. Fast-forward to a little more than one year later, the tenants in two of those properties gave notice to vacate right around the same time. They'd been there for a few years, so it wasn't too shocking. Still, we had a lot of questions racing through our minds.
Our 6 big tenant turnover questions:
- What is tenant turnover?
- How exactly does this process work?
- How long does it take to find new tenants?
- What needs to be done when turning over a rental?
- How does the tenant move-out and inspection process work?
- Most importantly: How much does tenant turnover cost?
These are all normal and rational questions you might expect to have yourself. The important thing is to keep calm. Everything is going to be OK!
What is tenant turnover?
Simply put, tenant turnover is when the current tenants move out and the rental property is prepared for brand new occupants. There are three big components to this process: the move-out, getting the property rent-ready and marketing it, and leasing the property to new tenants. Turnover is something all property investors deal with, and if not handled properly, it can really eat into your bottom line. Tenant turnover costs can range anywhere from $1,000 to $5,000, but estimated averages are somewhere in the ballpark of $2,500. The bottom line? Minimizing these events and getting through them as efficiently as possible is critical to your bottom line.
>>Related: How to keep great tenants in your rental — even if you live far away
How does the tenant turnover process work?
Rules and standards vary from state to state, but property managers or landlords typically send a 30- to 60-day notice before the lease expires. This is to see if the tenant would like to renew the lease, or if they plan to vacate the property. There should also be a clause in your lease that requires the tenant to give a certain length of notice if they don't plan on renewing the lease.
If you’re using a property management company like us, reach out to them directly and ask for a reminder on when the lease is set to expire. You can also log into your online owner’s portal (something that most property management companies use) to view records and relevant documents, including the lease agreement.
In late winter of 2018, I logged into my owner’s portal and confirmed my property manager had sent the notices on time. About a week later, we learned that tenants in two of our single-family rental properties were planning on moving.
How long does it take to find a tenant?
It depends. Rental vacancy rates can differ depending on the desirability of the area, the season, and type of property.
This might not be the answer you want to hear, but it's realistic (and nothing to freak out about if you’re prepared). If you have a nice place in a hip part of town, it might be easy to find new renters in a jiff. If your rental is farther from urban areas or desirable amenities such as schools and shopping centers, the vacancy period might be longer. Seasonality also has an impact: During the winter months, there is simply less demand and not as many people looking to move. This isn't always the case, but illustrates the point.
To get an idea of how long it will take to turn your rental, tap into the local expertise of your property manager or real estate agent. They live and breathe this kind of stuff, and have on-the-ground insight of what to generally expect in terms of how long it might take to turn your property.
You can also dive into the data. Knowing rental vacancy rates for a given metropolitan statistical area, or MSA, will help set realistic expectations from the outset. The United States Census Bureau is a great resource for this (see table 4), and I also like this chart from Apartment List that shows rental vacancy rates by state.
Back when I was a new real estate investor and researching potential markets, I studied Roofstock’s market data and other government housing reports. I found that a 7-8% vacancy rate was pretty common for the areas I was looking at in Atlanta, GA.
All in all, it took us three weeks to turn property #1 and four weeks to turn property #2. This included the time it took to prepare the properties, market them and get them rented out again. This was a little better than what we had originally estimated in terms of turnover timeline.
What needs to be done when turning over a rental?
Much of it depends entirely on your property and the condition the tenants left it in. It could be as simple as patching up some nail holes and hiring a cleaning crew, to gutting an entire room and making some needed upgrades.
Most likely, turning a rental property and replacing a tenant will involve most or all of the following:
- Catching up on deferred maintenance
- Deep cleaning from a professional cleaning service
- Touch ups to all interior paint, or repainting if the paint job is pretty old
- Professional carpet cleaning or replacing the carpet if necessary
- Optional aesthetic upgrades: If you’re looking to increase the value/appeal of your rental and bring it up to date, tackling this during periods of vacancy is easier than working around tenants' schedules. There is no shortage of research or data on what renters want the most. A few examples include walk-in closets, a washer/dryer unit, air conditioning and smart home features. Additionally, simple upgrades such new bathroom countertops, modern cabinetry, a beautiful kitchen backsplash or some landscaping can get you a lot of mileage and help your rental stand out.
Everything depends on the state of your property, how it stacks up to comparable rental properties in your market, and what you deem necessary or worth the potential return on investment. Your property manager will be able to gauge this better than anyone, but if you’re a hands-on type, do some reconnaissance and browse other single-family rental listings on Craigslist or Zillow to see if your rental is competitively positioned in terms of rates and quality.
How does the tenant move-out and inspection work?
If you've ever rented an apartment or house, you’re already familiar with the drill (you’re just on the other side of it). This is one of many areas where having a property manager saves you a lot of time and hassle. A property manager will coordinate a move-out inspection with the tenant, and evaluate how much of the security deposit goes toward damages outside of general wear and tear. In our case, our property manager also took pictures, which gave us a record of the state of the property before and after the tenants lived there. After the move-out inspection, the last thing was for the tenants to hand over the keys and garage door openers.
>> Related: The role of the residential property management company
Since this was our first turn process, I triple checked to make sure my property manager had contractors standing by on move-out day. I wanted to know what repairs needed to be made and what it would take to turn the rental as quickly as possible. Our property managers gave us repair bids from two competing companies.
My most important takeaway from this process? At the end of the day, what’s worth repairing is your call. Our property manager presented us with a list of suggested and necessary recommendations, and helped us decide what was right for our personal goals and budget. If you’re curious, the property management company we use is Excalibur Homes, one of Roofstock’s vetted property management partners.
How much does tenant turnover cost?
Here’s what we paid out of pocket to get two of our single-family investment properties rent-ready:
- Rental property #1 total turn costs: $2,500
- Rental property #2 total turn costs: $4,000
Total turn costs are ultimately dictated by the state of the property, the age of the property, market comps and rental demand. If you don’t procrastinate on annual maintenance and regular repairs, expenses could range anywhere from $500-$3,000. But if it’s time to address a necessary capital expenditure such as a new roof or HVAC system, that figure could be higher.
In our case, we bought our investment properties knowing that a few larger items needed to be fixed during the next turn, and budgeted accordingly so we were prepared. For the next turn, I would expect turn costs in the ballpark of $1,000-$1,500 for each.
Tip: Most investment properties on the Roofstock marketplace have an up-to-date inspection report, which includes an estimate of the turn costs next time the property is vacant.
One thing I can almost assure you is that the turnover process will be the most expensive part of real estate ownership. Expenses add up quickly between lost rent, repair and improvement costs, and tenant placement fees. The $100 monthly net profit you made over the last year can vanish overnight depending on turn costs, so it’s important to build this into your analysis when analyzing potential investment properties.
Tip: Roofstock factors vacancy costs and other expenses into each property pro forma to give you a more realistic picture of expected gains. Their Advisors can walk you through the numbers, and answer any questions you might have.
Lastly: If you’re self-managing, have a game plan ahead of time
I wrote this article from the perspective of someone who hired a property management company. But if you’re self-managing and relatively new to the game, do your homework and have a checklist of how to handle tenant turnover. Reach out to fellow investors and get involved in online forums. Vet contractors, repair companies and cleaning services well in advance, and schedule bid requests the day of, or after the move-out. Being prepared will save you time, and especially in the case of rental property ownership, time is money.
*****
Tenant turnover is a guarantee with rental property investing, but that shouldn’t scare you away. When you have the right team in your corner and processes in place, there’s no need to get overly stressed about it. Be communicative with your property manager, make the necessary repairs, and the process will be over faster than new tenant will be there in no time.
