Vacancy: The Ultimate Indianapolis Rental Property Cash Flow Killer
When you think about rental property expenses, things like maintenance, management fees and mortgages are probably what come to mind.
But there’s one item you may not find when Googling typical costs associated with owning rental real estate.
Now, you can argue that vacancy isn’t an expense per se. It doesn’t show up as a line item on your Profit & Loss statement, but it does have an impact on your income, and is what we’ve called time and time again a “cash flow killer.”
We always advise our Central Indiana Investors to consider vacancy as an associated cost of owning a rental property and to budget accordingly. A general rule of thumb is to expect your property to be vacant for at least one month out of the year or, at a minimum, 8%. Most industry experts will argue that 10% is a better number.
Fortunately, vacancy is currently at a cyclical low nationally, and Indianapolis is set to see a vacancy rate of 6.9%, which is down 70 basis points from 2016 according to homeunion.com.
Even though single family home vacancy rates are on the decline, it’s critical to be prepared for when your property sits vacant longer than you anticipated.
Why Vacant Indianapolis Rental Properties are Problematic
There aren’t many circumstances where having an empty property is a good thing – that’s fairly obvious. But there are several negative consequences that can come from vacancy that you may not have considered, including:
- Drain on cash flow – The most obvious and significant problem with a vacant rental property is the effect on your cash flow.
A single family home that’s vacant is 100% vacant.
Now, someone who has a medium to large portfolio may not feel the negative impact of a vacancy too badly. For example, if you own 50 properties, and you have 2-3 vacancies, your overall cash flow impact won’t be devastating.
However, if you only have one or just a few homes (like the majority of our customers) you’re definitely going to “feel” the impact of any vacancy.
To complicate matters, while you’re not collecting a rent check, you’re paying the mortgage, taxes, insurance, utilities, lawn care and other expenses out of your own pocket.
Pro Tip: It’s for this very reason that we strongly suggest that all Investors have a Reserve Fund established BEFORE they make their first investment.
We suggest at least 3 months worth of rent that’s stored in a separate account and can be used to pay for expenses when a property becomes vacant, or you incur a major maintenance expense.
No matter how well you budget, there will most likely come a day when one of your properties exceeds your vacancy calculations and you have to be ready for it.
- Security risks – I’m sure you won’t be surprised to hear that vacant rental properties are almost twice as likely to be broken into than any other home. Criminals are always on the lookout for easy targets.
In the city of Indianapolis alone, you have a 1 in 20 chance of being a victim of property crime, and owning an empty property basically doubles those odds.
You not only have to worry about squatters looking for shelter, but burglars looking to lift appliances or anything else they can get their hands on. The typical burglary results in around $2,300 of damage. So, on top of the fact that you’re not receiving any income from your vacant property, you could also get stuck with a hefty bill for repairs and replacements.
Not to mention, a break-in will delay the placement of a Tenant even further as you’ll have to wait until the property is in rent ready condition again.
Pro Tip: While there are definitely areas of Indianapolis that have higher crime rates than others, no area is completely protected from break-ins. For those of you who have concerns, we suggest employing a temporary alarm system such as SimpliSafe.
You’ll pay an upfront fee for the equipment, but there are no long-term contracts for monitoring. In fact, many offer daily rates and come with all the bells and whistles as traditional alarm systems.
When your home becomes Tenant occupied, you can easily remove the equipment, or even leave it on site for the Tenant to use. In many cases, a Tenant is more than happy to pay an additional fee for an alarm system.
- Emotional decision making – When you’re dealing with a property that has been vacant for an unexpected amount of time, it can cause you to react irrationally. You’re only human, it happens to the best of us.
If you’re not collecting any money on your investment, panic mode tends to set in. You may start basing decisions off of your feelings in the moment and not on sound, business practices. No matter how bad it seems, you have to fight the urge to A) sell your property immediately and B) place the first applicant that comes along.
First of all, real estate investing is a long-term play. Just because you have a bad year (or two) doesn’t mean you have a bad investment. You may have to learn that the hard way a few times.
Secondly, it’s not necessarily a wise decision to turn over the keys to the first person who shows interest in your property. No matter how tempting it may be to get a lease signed, you need to stick to some sort of screening criteria. Placing an unqualified Tenant will lead to even more hardship down the road such as property damage or worse, an eviction.
Tips to Keep Your Indianapolis Rental Home Occupied
Clearly, there are many negative consequences of having a vacant property and it’s in your best interest to work hard to keep a good Tenant in place.
There are a multitude of reasons that Tenants may want to move on from your property, some of them you can try to combat, others, not so much.
You can do everything right – win “Landlord of the Year” – and your Tenant still may choose not to renew. It’s part of being a Landlord.
However, having a well-rounded understanding of some of the common reasons Tenants vacate can help you prepare to address those objections when the time comes and, hopefully, win over some renewals.
Some reasons Tenants vacate include:
- Too expensive
- Space needs have changed
- Job change/Relocation
- Maintenance issues
- Want to change neighborhoods
- Renter’s Market
Here are a few tips to consider for high Tenant retention:
- Provide top notch customer service – If you self-manage your rental properties, then you need to realize that the Tenants are your customers and it’s your responsibility to provide great service to them from start to finish.
If you want a fighting chance of getting Tenants to stay for more than a year, you have to go above and beyond from the time they first inquire about your property until they give their notice to vacate.
How you handle maintenance issues is a major aspect of a Tenant’s overall feelings towards you as a Landlord, so maintenance is one thing you must get right.Along with that, be respectful, communicate well and make your Renters feel like you really care about them and their experience.
If you decide to hire an Indianapolis Property Manager to deal with that aspect for you, make sure you do your research, look at reviews, and conduct some interviews before entrusting your investment to a third party.
- Offer alternatives that meet Tenant’s needs – If a Tenant’s reasoning for moving out is that the home is now too big or too small, or just doesn’t fit their needs anymore, find out what they are looking for and try to direct them into another one of your properties if it’s available.
Or if they can’t afford the rent or a rent increase, it may be worth negotiating a lower rate in order to keep them in the property longer. Fewer turnovers means less vacancy and less money out of your pocket.
- Be proactive with current Tenants – One of the best ways to reduce vacancy, and turnovers for that matter, is to prolong your current Tenant’s stay. Renewals are a Landlord’s best friend.
You can achieve this by first providing outstanding service throughout the term of their tenancy and making sure they are satisfied with the home and your Property Management processes.
Second, you need to take the initiative and start a conversation about renewing well in advance of the lease ending. Ideally, you should start sending your Tenant notifications 90 days out and follow-up every 30 days or so to get them thinking about whether or not they want to continue living in your property.
This is also a good time to remind them about how expensive and tedious moving can be and show them the benefits of renewing their lease.
Obviously, you’re not going to win them all. Some Tenants, no matter how satisfied they were, are going to move regardless. Situations, relationships, and jobs change and sometimes there’s absolutely nothing you can do to make them stay.
But by being proactive, you increase your chances of getting a renewal significantly, which in turn, saves you from the threat of vacancy for a while longer.
Again, a lot of Investors and especially new Landlords, can get caught up in the minutia of investment costs. They may make multiple phone calls to save $20 on an A/C repair. The reality is that if you focus your energy on controlling your vacancy, you’ll be much more successful in the long run.
Next week, we’ll discuss 5 Tips to Minimize Vacancy in Your Indianapolis Rental Property.