Have you ever played the game of telephone? Where you pass a secret message around a circle and see how garbled it becomes by the end. Always shocking.
Communication is hard. Or more accurately, communication is hard for the other idiots playing the game. You are perfect right?
Communication in Rental Properties
It is pretty easy keeping an eye on my properties, even though I’m thousands of miles away. During most times there is very little effort required to keep things running smoothly. The property manager handles almost everything and deposits the rent into my bank account each month.
The big exception is tenant turnover.
Tenant turnover is when one tenant moves out and another moves in. Even though I have a property manager to do most of the work, I stay actively involved to make sure things run smoothly.
The Old Tenant
I purchased the property in Memphis during the summer of 2014 and the property management company quickly signed a tenant to a year lease.
After a year, he decided not to sign a new lease and to stay month to month for a while. This automatically increased the rent $100 per month, which was just over 10%. Since there was such a significant increase, I was surprised he stayed an additional 6 months.
He paid on time every month. Only one minor repair the whole time. But all good things come to an end.
In early December I heard from the property management company that the tenant would be moving out at the end of December.
Dag Nab It
Rental property investors want their tenants to stay in the property for a long time, gradually raising the rent along the way. A tenant turnover involves significant expenses that cut into profits.
To make it worse, he would be moving out at the end of December. Who moves during the winter? Seems like the worst time to find a new tenant.
I knew I would have to keep on top of the property manager to ensure a successful turnover.
The Property Management Company
My Memphis property is managed by a huge company that oversees a thousand plus homes. They are a behemoth with different divisions for rent collection, repairs, and tenant placement.
In contrast, my Atlanta property is managed by a mother and her daughter. It’s a little two person company who handles everything.
I already was a little hesitant about such a huge company, especially since they are expensive. Since this is the first time we have gone through a tenant turnover together, I approached it as a tryout for if we will be working together long term.
The main test is how well they communicate.
Create a Sense of Urgency
Every day that the property sits empty is another day without rent.
This is a bigger deal to the investor than to the property manager. So the goal of the investor is to keep pressure on the property manager to make sure things are getting done.
I averaged two phone calls per week week throughout the process and sent emails as well. Add it all up, I spent roughly 5 hours communicating with the management company.
At the end of December I called to make sure they were planning to get in the property right away after the New Years holiday.
Next were emails going through their damage report and deciding what to fix. Then more calls making sure the various contractors were scheduled to come in (plumber, carpet cleaner, gardener, etc).
Phone calls to understand how and when they would start showing the property. More emails and calls to find out why I wasn’t getting the regular updates I requested.
And then finally it was over. They found a tenant who met all the requirements and moved in on February 25th.
The Overall Cost
There are a lot of minor repairs when a tenant moves out. The standard things are carpet cleaning, touching up the walls with paint, and re-keying the locks.
In addition, my property had several items the tenant paid for from his security deposit. Some damaged sheetrock, a whole bedroom that needed painting, yard that wasn’t maintained, and additional cleaning that was necessary.
I ended up paying $300 for a few things as well. Since it was winter and the house would be sitting empty, we winterized the pipes. If the pipes froze they might burst and cause water damage, which would be a huge expense. So better safe than sorry.
We also did a pest spray to kill the few bugs and keep more from coming back. And a couple minor things like replacing the side gate latch.
There were also some repairs mentioned in the report that I opted to skip. Things like painting the shed in the backyard and replacing some damaged sheetrock in the garage (but there isn’t a hole for critters to get in).
The out of pocket cost to me was $300, and there is also a tenant placement fee of one month’s rent.
I am also responsible for paying the mortgage, taxes, and insurance even though I wasn’t receiving rent during this time. It took almost 2 months, which is roughly $1100.
The total: $2400. Ouch.
Back to the Good News
Unless there are significant repairs needed, I should still be cash flow positive for this property in 2016.
And there is a two year lease signed, which means 2017 will not have a tenant turnover and generate significant cash flow.
The two year lease is one thing I really like about this property management company.
The first year is leased at $995 a month and the second year at $1020. There is a 2.5% rent increase already worked in! The $995 per month is also almost a 5% increase over the original lease of $950.
The lease is very friendly to the owner – the property management company is very demanding of their tenants. A $1295 security deposit, which they are not shy about using. No pets. No smoking. Month to month after 2 year lease is $1120. The tenant is responsible for appliance fixes. And the tenant pays for minor maintenance under $500!
I wasn’t too happy with the communication and how long it took to get the tenant in place. But, the end result isn’t too shabby.
I received an extra $600 from the previous tenant in month to month rent. I ended up paying roughly $2400 for the turnover process. $1800 is about what I was expecting for the tenant turnover, so if you include the extra rent, it comes out as on target.
The two year lease makes me very happy. A 5% increase in rent year 1 and 7.5% in year 2 compared to the 2014-2015 lease is awesome. That comes out to roughly $1400 in additional rent over the next two years.
What do you think? Would you be happy with this tenant turnover?