Many would-be landlords love the idea of bringing in “mailbox money” – income generated from the rent they receive from tenants with only simple upkeep required.
If you’re a landlord, at some point, your property will be vacant, and that mailbox of yours will be empty. What will you do then?
Vacancy rates for rental properties in the U.S. have been below 10 percent since 2010, and as of the second quarter of 2018, they were just 6.8 percent, near the lowest levels in the last eight years, according to the U.S. Census Bureau. Low vacancy rates are in large part due to a nationwide housing shortage that has persisted in recent years and is due to the halt in new construction that occurred during the Great Recession and the slow pickup since.
But low vacancy rates nationwide – or even lower vacancy rates in your city – aren’t a guarantee that you’ll find a tenant for your investment property immediately upon purchase or after another tenant gives notice that she’ll be moving out.
The first thing to know about having an empty rental is how long you can sustain a property without tenants. Then it’s a matter of leveraging the tenantless period to reduce your chances of frequent or lengthy vacancies in the future. Here’s what you need to know.
You may already own the rental property, or you may still be shopping for the right one, but it’s not too late to do the math on how long you can afford to have this valuable source of income sitting without tenants.
The vacancy rate references the amount of time throughout the year you could expect your property to be unoccupied and not collecting rent. With a 5 percent vacancy rate, for example, your property would be vacant just over 18 days out of the year.
“You’re basically losing a month’s worth of rent a year on vacancy,” explains Daren Blomquist, senior vice president of communications for real estate information company ATTOM data solutions.
Considering a 14 percent vacancy rate, that’s just over 51 days without rent, which you would likely round up to two months. You need to be sure you have enough financial cushion to cover the cost of utilities, necessary repairs, possible renovations and marketing for two months without income from a tenant. Spread out over a year with different, short-term tenants, you could be looking at closer to three months’ rent lost.
As long as you have the financial ability to handle those vacant months, you can handle the higher risk. If not, this may not be a good investment for you to take on. Or maybe the monthly asking rent you’ve envisioned is too high, and you need to lower the rate to help ensure there are more renters who can afford to live there.
Reducing Your Chances of an Empty Rental
If you find yourself without tenants, you can do a few things to help shorten that time and reduce the chances of enduring a lengthy vacancy period.
Hire a property manager. If you’re a small-time investor with just one or two rentals and a full-time day job, your income property can’t be your first priority. A good option may be turning over daily management to a professional who’s dedicated to getting the space occupied and taking care of regular maintenance issues a tenant might have. A property manager also likely has access to more marketing outlets, platforms and renter networks to find potential tenants quicker than a Craigslist ad might.
Seek tenants with long-term needs. Reduce the chances of having to deal with multiple tenants moving out of the same place inside a year by noting in marketing or rental ads that you seek tenants willing to sign at least a yearlong lease. Once the tenant has signed the lease, you can rest easy knowing you won’t have vacancy for another year, barring problems with rent payment or eviction for any other reason.
Mary Gwyn, owner and chief innovator of Apartment Dynamics, a property management firm that also trains other companies on property management practices, notes that a month-to-month lease often asks for higher rent because of that greater risk for vacancy in the future.
“You can give notice and I incur lost rent while it’s vacant and [additional] costs to turn it for the next person,” Gwyn said in an email.
Make it a vacation rental. You could also go the opposite end of the spectrum and market your property on vacation rental sites like Airbnb, VRBO or HomeAway.com. To do so, however, the property needs to be fully furnished and cleaned between guests like a hotel. Unless your investment property is in the heart of a destination downtown, you likely won’t have guests every night. Consider this an option to help supplement some costs, but you’ll likely see high vacancy compared to a long-term lease situation.
Strategize for lease expiration dates. Reduce your chances of having your rental sit vacant for a month or more at a time by being clever about when you rent it out. Gwyn says Apartment Dynamics aims to make the largest number of lease expirations occur during the busiest time of year for renters to seek a new home. To get on the right pattern, you may have to keep your rental vacant on purpose for a month or two extra, but it could help reduce vacancy time for years going forward.
July and August are the most heavily trafficked for would-be renters, Gwyn says, particularly in Southern markets and for people trying to move without interrupting the school year. With eager new tenants looking for a place to live, “if people don’t renew, at least we reduce our risk of long vacancy and reduced rates,” she explains.
Lower the rent. If that cushion is depleted and the clock is really ticking for your finances, lowering the rent may be the best option to get a tenant in the place and paying rent. You may not be making as much of a profit as you originally hoped, but if breaking even on the monthly expenses is all you need, it may have to be what you settle for right now.
How to Take Advantage of Vacancy
The No. 1 goal of owning a rental property is to have it occupied, and aiming for 100 percent occupancy is, of course, ideal. “All things being equal, you’d want to keep that property occupied as much as possible,” Blomquist says, although he does note there can be a silver lining for those landlords who see a long-term tenant move out.
“If you have a tenant who’s in the property for a very long time, a lot of times you’re not raising the rent as quickly as you would if there’s a higher turnover,” he says. When a tenant who’s rented from you for five years moves out, you’re able to adjust the rental rate to match the current market more so than an annual increase of $100, for example.
Especially with long-term tenant move-outs, you also have the opportunity to take care of deferred maintenance and updatesthat otherwise went unnoticed by the tenant. A refrigerator on its last legs can be replaced with a new one, and you have the time to repair the scratches on the walls and damage to the floor from the previous tenants. While you hopefully won’t be enduring multiple months of vacancy, you can take advantage of a couple weeks without a tenant ready to move in to help make the space as new and fresh-looking as possible, which will hopefully help bring in higher rent.