By Paul Branton, Director of Investor Services for Home Rental Services
What do you do when the same tenant stays in your property for nine years?
First, you should CELEBRATE!!! You’ve successfully avoided a ton of vacancy and extra turnover costs. These are generally the two things that quickly eat away at the potential profits for rental investors.
Second, you should BUDGET. Just because you might not need the funds this year, doesn’t mean you won’t need them when the time for turnover comes. You should be diligent and set aside an appropriate amount of money each year as if you were “turning” the property.
In our experience, a good rule of thumb would be to plan on one months’ rent as the amount to set aside each year.
This actually took place recently for one of our investors.
One of our clients has been with us since we opened our doors 29 years ago. Wow, that’s humbling to think about… I’m only 5 years older than his relationship with our company! (Thank you Bob. We sincerely appreciate the opportunity to work with you!)
In this example, the tenant moved into the property in 2009 at a rate of $1,070/month. When the tenant gave notice to vacate in 2018, his rate was $1,155/month. If you take the $1,155 and multiply it by nine, this gives you $10,395 which should be enough to cover all the turn costs, deferred updates/upgrades etc. to bring the property back to market ready condition.
As soon as we received the notice to vacate from this long-term tenant, we knew we needed to get our renovation plan ready.
Here’s what that process looked like:
- We reviewed the photos from our leasing agents pre-marketing walk through.
- We requested the bids from our trusted vendors.
- We spoke with the owner and presented the vendor bids.
- The owner gave his approval.
- We scheduled the vendors.
- We waited for the lease to end.
- We performed the formal “move-out” inspection.
- The work began (as scheduled) the day after the lease ended.
- The project manager performed periodic site visits for quality control and to keep things on schedule.
- Work was completed ahead of schedule. (8 business days.)
- New marketing photos were taken. (For future marketing to highlight new flooring.)
- Move In Inspection was done.
- New tenant takes possession only TWO WEEKS after the old tenant vacated.
Oh, did I mention that the new tenant is paying $1,400/month? We were marketing the property with the new market rate and advertising the improvement plans. Would you believe that renters really like new paint and flooring? I know, it’s crazy. :)
So you may be wondering if we kept this turn to the $10,395 estimated budget. Well, we didn’t. We spent about $12k. We could have been good with $10k but since this investor plans to continue holding the property long term, we opted to replace the flooring on the main level with a longer lasting LVP instead of carpet. (This decision will actually save money on future turn costs.)
The math works though, because the new rental rate of $1,400/month will allow the owner to make $3,000 more each year!
All things considered, this a great success story in the world of buy and hold rental real estate. If you would like more information on our Investor Services, be sure to visit our website or give us a call!