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October 1, 2018

In the world of real estate investing, there are two numbers landlords consistently analyze: the cash flow their properties could produce in an ideal scenario, and the actual monthly cash flow they collect.

These two numbers are rarely the same. Why?

The cause is tenant turnover, a primary cash flow killer.

The Dreaded Vacancy

Vacancies Are Expensive

The obvious nightmare scenario for any landlord is a tenant that moves in and stops paying rent. Now you are facing eviction proceedings and related costs and hassle. Then, it's on you to repair and clean the unit after the tenants are finally gone. Together, this translates to a loss of income, expensive legal fees plus vacancy costs, and it can seriously impact your bottom line. The fact is, there are some "bad apple" tenants out there, and every seasoned landlord has at least one eviction story.

On the other end of the spectrum lies the routine vacancy. Eventually, tenants will leave. And what will it cost you when they do?

Cleaning and Repairs

Even the most conscientious tenants likely don't have the same cleanliness standards as you. And the longer the tenant has lived in the unit, the higher the likelihood you will have some substantial repairs or maintenance to tend to before re-listing the property for rent. Depending on the conditions of the prior lease, you may be able to use their security deposit for damages, but some expenses may go above and beyond that safety net. And extracting additional money from a departing tenant can end up being a significant challenge. You may need to tap into your reserve fund every time a tenant leaves, which quickly adds up.

Marketing and Administration

Do you print flyers to hang around town advertising your available unit? Do you run an online ad? Do you submit the listing to the newspaper?

Once you have interested applicants, you need to take time out of your day to show the property or hire a realtor or property manager to do so for you. Of course, don't forget all of the administration time you must allow for making sure the departing tenants have all the paperwork they need, and you've met all of your obligations as a landlord.

Processing/Onboarding Costs

Tenant screening is an in-depth process when you're focused on the details. You need to run (and pay) for background checks, keep applicant paperwork organized, and reserve time in your schedule to review each candidate. Then there's writing and sending the lease, getting signatures, and collecting deposits.

Income Loss

The longer you wait to take care of every other item on the list, the more income you lose. You need to carry all costs for the property, and you're missing out on the market rent until a new tenant moves in.

When you add up your vacancy expenses, it starts to sting. While it's usually considered a cost of doing business, over time, one or two months of vacancies per unit per year is a big missed opportunity for the profit-focused landlord. Is there a way to improve tenant retention, prevent tenant turnover, and make that vacancy rate drop?

Stabilize cash flow by reducing tenant turnover

What Can You Control?

Tenants' lives can change drastically during occupancy, and there's nothing a landlord can do. Maybe they're breaking up with a significant other or divorcing a spouse and need to downsize with a shift in economic realities. Maybe they're adding a child to their family and need more space. Are they relocating for work? There is a wide range of reasons tenants move on at the end of their lease that have nothing to do with you as a landlord.

On the other hand, there are several ways you can proactively prevent the dreaded vacancy. Here is a list of targeted and creative ways you can reduce tenant turnover:

Focus on Improvements, Not Just Repairs

From a landlord's perspective, repairs should be enough to keep tenants in place. After all, they rented the apartment in its current condition. Shouldn't maintaining the status quo be enough?

Not always. Repairs designed to maintain versus improve aren't exciting, and they don't show your tenants that you're invested in giving them a place to live that always is getting better.

Besides considering your tenants' perception, it's critical to think like a property owner, because you are one. Repairs maintaining the status quo are just a waste of funds if they're not improving the property's value. If you can increase the unit's value, you're either A) justifying a slight rent increase that tenants will gladly pay for to stay or B) making your tenants believe they're getting a fantastic deal if you don't end up increasing rent that year.

Make sure every dollar you spend is going towards improving the property, not just maintaining, and your tenants will notice...and stay put. Everyone likes a landlord that takes pride in property ownership.

Don't Wait for Problems to Arise - Be Proactive

So many landlords assume no news is good news. If tenants aren't calling you in the middle of the night to fix a burst pipe, they aren't at the forefront of your mind.

In reality, the more proactive you can be, the better. You'll probably save yourself money and save your tenant's frustration.

For example, consider setting up quarterly check-ins with your tenant. All it takes is a text or a call once every few months asking if they have any issues. Taking the time to fix the dripping faucet or replace the malfunctioning smoke alarm will head off significant issues and maintain goodwill with your tenant.

Make Curb Appeal a Priority Year Round

Everyone enjoys coming home to a manicured landscape. Give your tenants an increased pride in ownership by keeping curb appeal a priority, no matter the season. Timely snow plowing, weeding, mulching, and mowing all work together to help your tenants love where they live. Even if lawn care is part of the tenants' responsibility, it's still worth it to lend a helping hand. Hire someone to rake leaves or spread mulch - give your tenants a break from the yard work.

Reward Your Tenants for Staying

If you want to keep your tenants in place, there's no harm in a little incentive. Offer them a discount for signing a year lease if they were previously month-to-month. Give an even more significant discount and protection against rent increases for signing a two-year lease. Don't forget to send a holiday card with best wishes and a gift card! Or send them a thank-you note on their one-year anniversary of living in your unit.

Be Fair with Rent Increases

There comes a time when a unit is due for a rent increase. Always back up this decision with sound market data because you can bet your tenants know what they could get elsewhere for the same price. Rentometer is a great online rent evaluation tool that help you keep your rates inline with the rest of the market. Give plenty of advance notice and always stay responsive to tenant questions and concerns.

Develop an Effective Screening System

When you're screening your tenants, make sure you're efficient and comprehensive throughout the process. Ask for bank statements, credit reports, and always run a background check. Require a list of references and don't just read the names: call the phone numbers! It's relatively easy for applicants to create fake pay stubs or tax forms, so it's meaningful to not take at face value what applicants may claim in their submittal.

Also, establishing a minimum gross monthly income for each of your units helps set a standard for candidate renters. This is a smart way to ensure your tenants can comfortably afford to live there and limits the risk of placing a tenant who either pays late all the time or doesn't pay at all. 

Once you decide on your monthly gross income requirements (which should typically be 2.5 to 3 times total rent price), you can use software like Instant Income Verification to independently confirm an applicant's monthly receipts. This step increases predictability regarding a tenant's capacity to pay rent long term.

Your Goal: Long-Term, Responsible Tenants & Stable Cash Flow

It's clear: tenant retention takes commitment, but when you look at the ROI, it's easy to understand why it's worth it. Keeping your units full year-round with responsible tenants to stay provides stable cash flow and profitable rental business. To a landlord and property owner, that's a success.

About the Author: Michaela Mendes is a content writer for The Closing Docs, an online income verification service that helps property managers make the best tenant approval decisions. Instead of pay stubs and bank statements, our income verification instantly calculates your applicant's annual and monthly net income using verified bank data. And it's entirely free for property managers!