One key question many seasoned and new property investment folks have is what percent of the time they can expect a rental unit to be vacant. Most lending institutions average it out to a 75% occupancy rate, which is used to account for rental income in a mortgage loan. Is this an accurate assessment? In my experience a 25% vacancy per year is a bit high, but it may depend on how well you pick tenants and manage the rental units.
Calculations on my rental units indicate a rate of 7.5% vacancy per year. This figure would be much lower if I exclude a few outlying situations over the past 15 years. On average I can expect one vacancy every other year for all my units. Taking out the two shortest rental periods I have had, would put the average occupancy per unit at about 3 years. I consider this a good to exceptional occupancy rate.
How can this be achieved? In two different areas, customer satisfaction and matching the tenant to the property. Here are some key points to keep in mind for each category:
These are a few factors to keep in mind when considering the tenants satisfaction with the rental in general:
- Great Rental Units— I try to pick properties that have above average rental units, hence owning duplex properties over multi-level properties. Private parking, enough space for occupants to feel at home, and updated and clean units are a few factors that come to mind.
- Attentive Management— Listening and following up on tenant concerns goes a long way in keeping the units occupied. Even in times of crises, (water heater died, furnace not working or power outage) I try to assert that I am on top of the situation and feel their pain. I have even assisted in areas that I did not have to, like a washer dryer hookup, to show that I appreciate their occupancy. Staying away from the grumpy landlord stereotype can net you a longer occupancy rate.
- Allowing limited ‘Improvements’— While a tenant occupies the unit their might be subtle hints at improvements. Consider them and if legitimate act on them. I have allowed room’s to be painted (in a reasonable color ), have freshened up the exterior paint on properties and even completely redone a three season porch as examples. These improvements may or may not have been warranted, but the tenants will feel more at home when these improvements are done.
- Following Lease Terms— As the property owner you should expect the tenant to stick to the letter of the lease agreement. The same should hold true in reverse. If you are responsible for a given task spelled out in the lease, make sure you are doing the task. Not holding up to your end of the lease will be noticed by the tenant. They may not bring it to your attention but might decide to exit once the lease is up.
Matching Tenant to Property
Here are some tips to ensure that you are choosing the best tenant for a given unit:
- The 1/3 Income Rule— In general I have the best tenant retention when the rental rate will be no more than 1/3 of the tenants income. I don’t provide most utilities and have observed this rule of thumb will insure that there will be no financial hardships during a rental period. On the few occasions that I have let this slide a bit, I received the expected results. The tenancy was cut short of the long term expectation.
- The Space Fits The Rental Party— A two bedroom unit for a family of 5 just does not work. This may seem obvious to you, but their will be times when potential renters will attempt to convince you otherwise. I let this slide once with a unit that had 2 large bedrooms and a study that was as big as a bedroom and situated off of the kitchen. The rental did not make it to the termination date on the lease. If it is not a fit don’t let the applicant convince you otherwise.
- Emergency Rental Situations— If an applicant indicates an urgent need to rent, is hurrying through the application process or indicates any adverse reasons for immediate occupancy; think twice before considering the application. More often than not, their adverse situation will soon be your adverse situation. Often these hurry tactics are an attempt to get the property owner to negate due diligence in screening the applicant. When I am in this situation, I double up on my screening efforts!
- Communicate Long Term Rental Goals— It is OK to prefer tenants that are looking for a long verses short term rental and you can communicate this preference to the tenants. If they are honest they will discuss their long term goals, but match that against their past rental history. Past rental history tends to repeat itself…
Percent occupancy rates will determine your overall profitability for your rental units. The shorter the occupancy the more time, work and money you will need to commit to the units. While you may not always have complete control over how long tenants will occupy a unit, following the above tips will tip the scales in your favor, for long term occupancy rates.