Thinking Ahead to Maximize Your Rental Property ROI for Success
By now you may be starting to review your progress for the year and thinking about what you hope to accomplish in 2020. That’s what we’ve been doing here at JWB too, so I wanted to share some ways you can consistently increase your rental investment returns.
As you plan your strategy, be sure your rental property goals include a plan for keeping long-term tenants. Most property managers forget about this element, but it’s the most important topic that is directly correlated to your rental property ROI success.
Hidden Costs of Rental Property Turnover
The single greatest determinant of your rental property ROI as an investor is how long your average tenant stays. Take a look at the following example to see my point.
Let’s say you have a rental property that is rented out at $1,150 per month. On average, when the tenant leaves you’ll be faced with these costs:
- 45 days of lost rent = $1,701
- Average turnover repairs = $2,000
Going into your investment, you expected to lose $1,656 (12% of rents collected) in maintenance and vacancy costs. However, if your tenant moves out every year, that’s a loss due to maintenance and vacancy costs of $3,701 a year. Think about the long-term effects of that. Over a four year span, it’s going to cost you nearly $15,000 in maintenance and vacancy costs – that’s 27% of your rental income. Ouch!
Lost rent and turnover repairs will ultimately determine how successful you are in this investment. There is a big risk in working with a property manager who doesn’t understand and isn’t incentivized to care about this simple fact. When that property manager doesn’t focus on keeping and re-signing tenants, you’re setting yourself up for failure.
Benefits of Long-Term Stays
In contrast, when your tenant stays four years, the returns skyrocket. You only have $3,701 in turnover repairs and vacancy costs every four years, a 6.5% hit. Looks much brighter than a 27% loss, doesn’t it?
No matter how you look at it, it’s a punch to the gut each time a tenant moves out. If you can defer that cost to every four years, however, you can offset those expenses and maximize your rental property ROI.
Three Keys to Reduce Tenant Turnover
Here’s how we increase resident stays:
Key 1: Sign two and three year leases. At JWB we’re particular about the types of leases we sign. When a prospective tenant calls, we make it clear that we specialize in long-term leases. By setting this expectation up front, we’re able to structure the terms to everyone’s advantage.
Moving is expensive for tenants too, so we find incentives for them to sign longer leases. The last year of each lease term has a $50 rent escalator. The longer the lease, the longer they can lock in their current rent rate. Tenants appreciate knowing their long-term financial commitment.
Key 2: Invest in new construction or fully renovated properties. By doing this, you set your residents (and yourself) up for success. Things don’t break as often in brand new or fully renovated properties, and many items are still under warranty.
Key 3: Treat lease renewals like a sales opportunity. We analyze the strategy behind lease renewals. This is the single greatest opportunity to increase your returns, but is often overlooked by property managers. We start planting seeds to re-sign tenants as soon as they move in.
At JWB, we’ve tracked all of our clients’ returns on investment since 2011. That’s how we truly know the benefits of long-term tenant stays:
- Our average tenant stays 49 months.
- Our vacancy costs are 4%. (Industry standard is 5%.)
- Our maintenance costs are 2%. (Industry standard is 7%.)
We’re here to build a relationship with our tenants (we call them residents), so every interaction is an opportunity to offer a lease renewal. That’s a win for everyone!
Learn how we can help you maximize your rental property ROI for long-term success at www.JWBWebClass.com.