The Cost of Tenant Turnover

By Josh Kattenberg

In a previous blog post we dealt with the cost of vacancy. Another hidden cost of rental property that owners often do not consider is the cost of turn over. Whenever a tenant leaves a property making the property rent ready and finding another qualified tenant costs money. The national average cost of a turnover is equal to three month’s rent not including the lost rent during the vacancy.

The costs of a turn over include:

1)    Most property management companies in Sioux Falls charge a lease up fee equal to 50-60% of one month’s rent. (Real Property Management Express does not charge a lease up fee.)

2)    The cost of the vacancy between tenants which we laid out in a previous post.

3)    The cost of making the property rent ready. In the property you live in currently, there are things that need to be repaired, cleaned, or organized. Chances are that they have needed attention for quite some time. This is the same for anything you own or rent, whether a car, office, computer, email account, or bike. The more complex the item, the more things that probably need to be fixed, cleaned, organized, etc. So why haven’t you fixed these items? Probably because they are not that big a deal, procrastination, or you have just learned to ignore them. The same thing happens with tenants. Before they move in, the property is probably in the best repair it is ever going to be during their tenancy, yet during the first month or two of tenancy tenants will find the most problems. Most likely because the property is new and they notice everything that doesn’t work property, isn’t clean enough, etc. By month three and four, they do not notice little items and have learned to ignore them. Why does this matter? Because the tenant who stays two or three years will have less maintenance requests than three tenants who stay one year each. Also, with a long term tenant, the landlord will not have to clean/replace carpet, paint, wash windows, and the multitude of other things that need to be done to attract a new tenant. Turnover is expensive.

4)    Because turnover is expensive, getting top dollar in rent is not always the best. Once the lease is up, the tenant will be looking at comparable rents and will move if they can find something cheaper. Toward the end of the lease, the landlord should also be looking at market rent, not only to raise the rent, but perhaps to lower it. If market rents have come down in the past year, consider offering the tenant a new lease at a lower price. Consider a $1,000/mo rental. If the property goes vacant, you may have to pay a $500 lease up fee, have a month of vacancy worth $1,000, plus do some improvements such as painting ($500-$1,000). The turnover could cost you $2500, while decreasing the rent by $100/month only costs you $1200 over the course of a year. – See more at: http://expressrpm.com/the-cost-of-tenant-turnover.html#sthash.OM5UQRLd.dpuf

1 reply
  1. Domenick
    Domenick says:

    You make an excellent point that more landlords need to understand. Lowering rent to save money is very counterintuitive. Most new landlords fail to understand the true cost of a turnover so they don’t appreciate the potential cost savings of keeping a tenant – even at a reduced rent.

    At the end of the day, if the tenant can find a lower rent for a comparable unit, then you will ultimately need to adjust your price. You might as well avoid the turnover costs and the hassle. Lower your rent when it is too high. It will save you thousands!

    Thanks for the great article!

    Reply

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