Ep. #8 - Don't Let Vacancy Kill Your Rental Cashflow

Rental vacancy can be one of the largest expenses you'll face as a Landlord. And the fewer properties you have, the more impactful it can be. Because if you have one rental property and it goes vacant for any period of time, then you suffer a 100% vacancy rate - with ZERO rental income.

Having more properties lowers the percentage of vacancy suffered, such as a Landlord with 4 units with only 1 vacant, suffers a 25% vacancy rate - with rental income still coming in from the other 3. But regardless of how many rental units you have, you don't want a unit that rents for (let's say) $1,200 per month, sitting vacant for even a single day longer than it needs to, as you are losing $40 of rental income per day!

So let's talk about how to avoid letting vacancy kill your rental cashflow...

Welcome to Episode #8 of the [... and Landlord] Rental Real Estate Investing Podcast- Don't Let Vacancy Kill Your Rental Cashflow. That's the topic we're going to discuss today. Oh, and I am really loving having a Podcast. Ideas for episode just keep coming to mind, and I've not even had my first guest yet. So for all those who've been listening, THANK YOU for your support. OK, so let me share a quote...

"Planning is bringing the future into the present so that you can do something about it now." - Alan Lakein

So how does that quote relate to minimizing or eliminating vacancy? Far to many Landlord fail to plan for tenant turnover. You know that your tenant is going to leave at some point. Plan for that day from the start, thereby bringing that day into the present so that you can do something about it NOW.

How do you do that? It actually starts with the lease you create with your current tenant. Set provisions into your lease so that the exit of your current tenant happens under circumstances that makes it easier for you to prepare for and obtain your next tenant.

For example, many Landlords put in a default 30 days notice required to end or prevent auto-renewal of a lease. No, no don't do 30 days... unless prevented by law, your month-to-month lease should require a 45 day notice to end tenancy. But for that matter, DON'T do month-to-month leases!

If I do a month-to-month lease, it is never for more than 6 months and MUST end in July, so February through July only. If still in the home come August, then they must sign a minimum 6 month renewal through the end of January of the following year. Why? Because the further into Fall and Winter we get, the harder it becomes to get a new quality tenants should the current month-to-month tenant suddenly decide to leave.

November and December tenant turns are to be avoided like the plague. And if you do allow a month-to-month lease, charge a premium. I charge a 6% premium if a tenant wants to go month-to-month - to discourage it first, but also to build up additional cash reserves to over-come some number of vacancy days when they do leave. But if I do my job properly, the vacancy days between tenants will be something minimal, like 2 or 3.

So, why 45 days notice required to end a month-to-month lease? Those extra 15 days are critical... You find your next tenant during those 2 weeks starting the day after you receive notice from the current tenant. And since most tenants are currently renting elsewhere and will need to provide 30 days notice to their Landlord (who doesn't likely follow this 45 day policy), it gives you enough time to find, screen and prep for your new tenant, and they have time to notify their current Landlord.

Now if the tenant is NOT on a month-to-month lease, then you put a provision into your lease that it automatically renews for another 1-year term (with an automatic rent increase) - if notice is not received of intent to either end the lease or drop to a month-to-month tenancy at least 60 days prior to the end (the renewal date). But for good customer service, you set a reminder notice to go out to the tenant at 90 day point, alerting them to the coming 60 day notice deadline.

The tenant either then allows the auto-renewal to happen at the already known increased rent, or they elect to end the lease and vacate (giving you 60 days notice). Or they request to drop to month-to-month tenancy, which if allowed (Feb to July only), it will be at an already known rent increase (maybe 1.5 to 2%) + an the additional 6% premium that you charge for month-to-month tenancy.

This all means that vacancies do not happen for you without you getting ample notice. So what do you do with that notice? It must also be stated in your lease that once notice to end the lease and vacate premise has been given by the tenant (be it 60 or 45 days in advance), you have the right as Landlord to enter the property with 24 hours notice. Now this right should be established in your lease anyway, but in this case its specifically for the purpose of entering the property to conduct inspections (to make sure its actually clean and tidy), to take pictures and video; but most importantly to conduct showings to find your next tenant before the current tenant even leaves the property.

How to handle showings:

Upon receiving notice from the current tenant, you will immediately list the property for rent (everywhere), including a sign out front if allowed and appropriate and also effective in your area. You field the inquires (and I'll have a separate episode on that), and once pre-screened (more on that coming also) - you pick a certain day and you schedule showings for that day every 15 or 20 minutes within a 2 to 4 hour window. You do this while the current tenants are still living in the home, but NOT while they are actually present. Make sure its a day and time when they're not going to be there.

During the showings, you remain behind the person, directing them where to go. You do not allow more than 2 persons into the home at the same time - and NO CHILDREN. After-all, this is still someone else's home and the last thing you need is for someone to take something or for a child to break something. You let the current tenant know that people will be in the home for supervised tours, and that you require the home be neat and clean with access available to all rooms, and all valuables put away.

You arrive early, about 20 minutes before the first showing, and you do a video walk-thru of the entire home. You actually do the video walk-thru twice. The first time you are doing it by paying close attention to the items that are in plain sight within the home, in case any claim is made of something going missing, you then have a video for reference from prior to anyone coming into the home. The 2nd walk-thru video is to show the home for anyone that pre-screened well, but could not make it over on that day during your showing window. Have this video edited and then make it available only to those who are interested in the home, but unable to make the showing.

You should also have and keep high quality pictures and a walk-thru video from when the home was empty prior to the current tenant. This all should give person's enough confidence to apply for the home without having a showing, although most will still insist on it. if so, you insist that they come during the established window, because it is an occupied home that will not be vacant for another month or more, and you must respect the quite enjoyment of the home for the current resident - so you are only planning to do 1 showing. And if you cannot find your next tenant from that showing, then do another a few days or a week later.

Rental Listing:

If you do not get much interest in your rental listing, then you have a problem that needs to be solved. Hopefully the problem is not your property location, as that is the hardest (if not impossible) to fix. If the location is good, but you have an issue with the property condition or pictures, then get that fixed. Although its not a good look to start repairing and improving things for some unknown future tenant when you did none of that for the current tenant. You also don't want to be making major improvements while the current tenant is still present, that may then get damaged prior to or during their exit.

Now if you're not getting much interest in your rental listing because of price, that is easy to fix. Consider... If you reduce the price by $100/mo from $1,200/mo to $1,100, you are losing $1,200 per year at that lower rent. But if it prevents you from having a month of vacancy, then the result is exactly the same. And if it stops you from having 2 months of vacancy, then you prevented a $2,400 loss! The house will rent quickly at some amount, and so you must determine if the reduced rent to get more eyes on the property may result in a better outcome than risking a month or more of vacancy.

Price cures all problems. So, if your problem is price as to why people aren't looking at your rental, just lower it a bit. It’s far better to just lower your price a little bit, and have more eyes on your property, than to be stubborn on price, and get tumbleweeds and crickets, because you might find that ideal tenant at a price that’s 20 or 40 or 60 or 80 or $100 less than what you were asking for, or what you wanted for the property, but that tenant might be wonderful. And they might be there for years to come, especially if your properties tend to be like mine where they’re really nice.

You give a good tenant a really nice home at a slightly below market rent, and that tenant is likely not only to be there for a long time, but to have pride in that home, and to take care of it. And you can always increase the rent at each renewal. Me, personally, I like to keep my rents a little bit below the market rate, anyway. I don’t mind lowering the price a slight amount if it’s going to get me more attention, and then it’s going to eventually get me a tenant who’s likely to be in that property for 3,4,5 years or more.

Tenant Turn:

Vacancy kills your rental cashflow not just because of the period of time that the property sits empty, generating no income. That’s one thing. But even worse than that, I've seen estimates that the typical tenant turn is about $3000, to get a property ready to be re-rented again to a new tenant, because in many cases, you might have to put in new flooring, you may have to paint. Right there, that could easily be $6000 just for those two things.

Imagine if you have to do even more. And imagine if you have tenants that leave every year, and you have to go through that expense every year in addition to a month or two of vacancy, $3000 or more, to get the property ready for the next tenant. I mean, you have a property that rents for, let’s say, $1500/mo, and you suffer a month or two of vacancy, then you have another $3000, or more, to get it ready for re-rental. You could easily be $6000-9000 in the whole for one period of vacancy for a month or two, and the expenses related to getting the property ready to be rented again. Avoid that. Avoid that by, first of all, keeping your existing tenants for as long as possible, but also making it so that when one tenant is on the way out, the next tenant is on the way in right behind them with days, not weeks, not months, in between.

Now, in a perfect world, the old tenant will be moving out on, let’s say, Friday, May 31st, and the new tenant is going to be coming in right behind them the next day on Saturday, June 1st. No time in between, and you didn't even miss a day’s worth of rent.

But realistically, you need to account for some number of days in between tenants just to handle your repairs and maintenance and cleaning. There’s a process to that as well. For instance, I have a property that will be going vacant on June 2nd. The tenant is paying for two extra days in June, because of the fact that that’s a weekend, and they wanted those extra couple of days to get everything moved out and cleaned up without being pressured to do it during a weekday.

So, that’s fine. The tenants that are coming in their place, I scheduled for them to start their lease on the 7th of June, that following Friday. So, I have the Monday through Thursday, basically, to do what I need to do. I have those four days to get my handy man in there, and any other vendors that I need to do work for me, to get them in there and get it ready for the next tenant.

Now, I assume that there’s going to be some paint touch up that’s necessary. I would be surprised if it is anything beyond that that needs to be done. I'm pretty confident that I'll be able to get this property turned around and ready for the next tenant with literally one day for my team to go in there, and do the needful to get it ready for the next tenant. If my tenant coming in wanted to start on Tuesday, the 4th, I'd bet you we could accommodate that, and do our work on the 3rd, that Monday.

Types of Tenants:

The reason I have that confidence is because of how I run my rental business. I don’t sign a lease with the tenant and then disappear, and only interact with them when they report some maintenance problem, or when they’re behind on their rent.

I have regularly scheduled inspections, where every quarter, every three months, I'm going to come in that property, and I'm going to inspect not just that all of the mechanicals are working properly, but I'm literally being completely upfront with them that I'm coming in, in part, to inspect how well they are taking care of the home. With the major part of that being cleanliness. Is the home clean, or is it filled with piles of junk and clothes that haven’t been washed in weeks? Because those are the types of things… food everywhere, that breed pests. I don’t want pests in my properties, and I don’t want properties that are not being properly maintained.

So, I let them know that I'm coming into the property every three months, and if there’s anything that is determined to be below our standards for how a property needs to be maintained, that’s a violation of the lease, and I'll give you the opportunity to cure it. But if it continues beyond that first time, I literally would evict someone over that. And I'm so adamant about these things, even from the very first contact of a potential tenant, I haven’t had the problem yet, because people know that I'm serious about it.

I make it so obvious that there have been tenants that, literally, decided that they did not want to rent from me after getting the e-mail that goes out as an autoreply to any inquiries that come in. You inquire about one of my properties, you get an autoreply, and that autoreply will tell you all about the property, and it will have a link to where you can apply and have pictures, and everything of that nature. But it also has a highlight of our more critical policies and procedures. And it goes over our rental criteria that we are going to use to determine if you qualify to rent the home, and also the policies and procedures that you would have to adhere to.

And it talks about no smoking, and how we handle late rent payments and no one else living in the home other than the people that are on the lease. All of the different things related to the inspection policies and all of that, it’s all in that e-mail that they get right from the start. It’s meant to be scary. It’s meant to be off-putting, so that those people who would have given me a problem, they go away magically after reading that e-mail.

And so, I've had people say ‘no thanks’, because apparently you evict because you breathe too hard. Okay, well, good! That person was going to cause me a problem, anyway. So, I'm glad they read it and took that from the e-mail. That was the intent.

The people who get past that e-mail are the ones who likely would not have been a problem for me anyway, and they don’t care that I'm going to come in and do quarterly inspections. They know that they take care of their home, and they have no intention of violating any of the lease policies. They don’t care how I handle late rent, because they knew they weren’t going to pay their rent late anyway. They don’t care about how I handle people living in the home who aren’t on the lease, because they weren’t going to be moving in any cousins, nieces or nephews in the first place. They don’t care about my smoking policy because they don’t smoke, and they wouldn’t have someone in their house smoking.

So, these are the types of tenants that I look for, and because of this, when one of those great tenants does unfortunately decide to leave, I know that the house is in good condition, because I was just in it a month or two ago, or maybe it was right up at that three month period, where I was going to be coming back in to do another inspection, anyway. But I know that three months ago, it was in great condition. Unless they completely trash the house during the move-out, I already know that it’s in a pretty good state, and it shouldn't require all of that much in order to get it ready for the next tenant. And therefore, I only need a day or two.

And if it’s the case where this tenant has been in the property for something like five years, or so, and it’s time to put in a new carpet, or it might be time for a complete paint job, well, I'm going to account for that. And first of all, weeks in advance, I'm going to already have that schedule to happen on that day after the prior tenant vacates, they’re coming in to handle it. And I would give myself enough time to get everything done that’s necessary. But I already have this all planned, so it’s just like the quote at the beginning… you plan to bring that future date into the present so that you can take action on it now.

It’s all about knowing what your circumstances are, and planning for them, so that you can get this property turned around in the quickest amount of time possible. And hopefully, you had a tenant who had been in there for years, and hopefully you have another tenant coming back in that’s also going to be there for years.

And I will do an episode about my pre-screening process, and the e-mails that go out, and how I make tenants communicate in the way that I require them to communicate, how I purposely make them jump through certain hoops just to see if they can follow directions.

And it goes into things as simple as… If someone wants to see a rental the following day, I'll go ahead and tend to schedule that appointment, so I know about when they’re wanting to do it. But I'll also tell them that, okay, your showing is tomorrow at 11 am. You need to call me at 10 am to confirm that you’re going to be there. If you don’t call at 10 am, I will not be there at 11, and you would be surprised how many people don’t call. And sometimes how many people actually show up for the 11 o’ clock appointment, but didn't call at 10, like instructed. That’s fine. I won’t be renting to that person, anyway, because I know now that they can't follow directions.

But when you get the person who can follow directions, and does go through all of your pre-screening criteria without a hiccup, and isn't turned off by the e-mail that you send, telling them all the different ways they’re going to get evicted if they break any of these rules, that person, they’re not going to be a problem for you. And I can tell you also, that they will respect the way you run your business, and that you are a professional. It will be a joy to them to be a tenant, and they will be a tenant of yours for years to come.

The Tenant is Your Customer:

So, you will lessen the likelihood of a tenant turnover, but you always have to remember that once someone does become your tenant, that they are your customer. Yes, you’re running a business. Yes, you have to do certain things a certain way, and you have to make sure that everybody is adhering to the rules and regulations of your business, but never forget that your tenant is your customer. Treating them as though they are a valued part of your company, will also make them want to stay longer.

It is not uncommon for me to send a gift card around the holidays, or to give a person a bottle of wine or something that they’re going to enjoy like that, because you want them to know that they are a valued member of your company.

Blue Chariot Properties values its customers which are its tenants. And if we do that, and do it well, they stay around for a long time, and so you don’t want to do anything that’s going to make it more likely that your existing tenant is going to leave, but you also want to have systems in place that when they do leave, you can have another tenant right around the corner, days, not weeks, not months, ready to move into that property and start that cycle all over again with your next tenant.

All of my properties are occupied. I have no vacancy, and I have not suffered a complete month of vacancy in any of my properties with one exception. And the one exception was me breaking my own rules, and that was I allowed a month-to-month tenancy to occur without certainty as to when it was going to end, and right up till the day that it ended, I didn't know if the tenant was going to be renewing, or if there tenant was going to be vacating. And they went back and forth on it several times, but I didn't enforce the fact that I need an answer thirty days before the decision. I let it be up in the air right until the last moment, trying to be nice, and I ended up with a month of vacancy as a result. That property was rented at $1200/mo, so I literally lost $1200, because I violated my rules one time. Don’t worry, it won’t happen again.

Book Recommendations:

Okay, enough of that. I could go on and on talking about things you should do, and in some cases, what you should not do to minimize the likelihood of suffering a month of vacancy. But I think you got the idea. I wanted to mention something else. Last week’s episode was about books. And so, we released https://www.andlandlord.com/books/, a page on the website that features all of the books that I recommend a real-estate investor, and in some cases, just a business person, should read. I have not had a chance to personalize each of the entries on that page, to let you know what this book specifically did for me. I'll get to that for each book as I have the opportunity to do so.

They all played a critical role in where I am today. Every one of the books on that page did something meaningful to improve what I was doing as a business person, to improve what I was doing in real-estate, or to even teach me what I should be doing in real-estate. So, for different reasons, all of those books have a very valid purpose as to why I put them there, but I'll go into detail on each of the pages as to exactly what the book did for me.

One that I just finished writing is about The 4-Hour Workweek. So, go to https://www.andlandlord.com/books/, find the 4-Hour Workweek on that page, and select that one. It has a little write-up of what that book was for me.

Another one that I finished is Secrets of the Millionaire Mind. So, go to https://www.andlandlord.com/books/, find Secrets of the Millionaire Mind, on that page, and then click through. You'll see the details that I wrote about how that book affected me.

I mention in there that the book can be a little hokey at times, but it’s an amazing book about the mind, about programming, about your mental programming, about your mental blueprint; why you do the things you do, and how the different negative ideas about wealth and money, like ‘money doesn't grow on trees’, and ‘money is the root of all evil’, and’ I can't afford it’. All of those different things that get programmed into our minds from childhood on, how they affect us and our money and our wealth outlook, all throughout our life, and as I was reading that book, I encountered several references that spoke to me directly. I was jaw-dropped reading some of the things that it had to say about programming of the mind and mental blueprint as it relates to money and wealth. I loved the book even though it’s a little hokey at times. I highly suggest that you read it.

Go to https://www.andlandlord.com/books/, and find Secrets of the Millionaire Mind, find the 4-Hour Workweek. Those are the books that I've most recently highlighted as to what they did for me, and I think the 4-Hour Workweek, is a perfect example of exactly what I've been doing for the last twenty years. I've been self-employed since 2002, and it’s because of the types of things that the 4-Hour Workweek book tells you to do, that thankfully I stumbled across before I even read that book. It works, and it is what has allowed me to be self-employed for all these years. So, check it out, anyway at https://www.andlandlord.com/books.

Conlusion:

Now, I’ll get out of here now. I think this is the first time I've crossed the thirty minute threshold on an episode. I didn’t think that would happen until I actually started having guests, but I had a little bit more to say on this topic, and maybe I was a little too long-winded, I don’t know. Give me your feedback. Let me know how I'm doing, and I can't improve unless I have the feedback to know what I'm doing right, what I'm doing wrong. If there’s a topic you would like me to do a show on, whether it would be me, solo, or I bring on a guest to share their expertise, I'm open to suggestions. I'm doing the show not just for myself, but also for you. So, I want you to let me know what you want to hear, what you want to learn. And for those who have been listening, I sincerely appreciate it. And if you do have any desire for the books that are at https://www.andlandlord.com/books/, it is helpful to me if you buy them from that page. I'd thank you for doing so, and I'll see you next week.