How to Manage Tenant Turnover as a Property InvestorOct 10, 2023
As a real estate investor, your ultimate goal is to make a return on your investment. Using a multifamily property investment strategy, you can generate healthy streams of passive income from dozens, or even hundreds of tenants. After all, every tenant is required by law to pay rent every month. Those monthly rental cheques add up into a sizable amount of cash.
But what happens when you need to fill a recent vacancy? What if your newly acquired property has numerous tenants moving out? Tenant turnover is a real concern for any investor. Luckily, there’s a helpful checklist you can use to manage it effectively.
How should you approach tenant turnover as a property investor? Here are some of the most basic tips to keep in mind as you build your real estate portfolio.
First of all…what is tenant turnover?
As a concept, tenant turnover is fairly straightforward. It’s a metric used in real estate to analyze the number of tenants who vacated their units at the end of their respective leases.
Whenever a property is listed for sale, conduct your due diligence before submitting a bid. Due diligence primarily refers to inspecting the property conditions, the quality of the land, and the legality of the sale.
But you should also conduct due diligence into the property’s tenant turnover rate. Your tenant turnover rate is calculated by dividing the number of open vacancies in the building by the total number of available rental units. Multiply the difference by 100 to get your tenant turnover rate.
Why is it important to know the tenant turnover rate?
There are two main reasons why it’s important to know the tenant turnover rate before you choose to invest in a property.
1. Vacant units reduce your rental income
The first reason is simple to explain and even easier to understand. Vacant units mean no tenants are paying monthly rent to you as the property owner. Your potential earnings from rental payments are limited and lesser than possible due to open vacancies.
In fact, the average tenant turnover costs investors over $1,800 every time a unit is left vacant in the building. If you have a high turnover rate, those costs can quickly add up and eat into the earnings you wish to make from your investment.
2. Repetitive tenant turnover could indicate red flags with the property
The second reason is a symptom of a much deeper, and potentially very expensive issue. Typically, if tenants are satisfied with their residences, and the buildings at large, they’ll renew their leases or continue renting on a month by month basis.
When these actions are not taken, it’s reasonable to ask the question ‘why.’ One or two tenants choosing to move on at the end of their leases suggest personal reasons, and there will always be people who decide to move on. No building can be perfect to everybody all the time.
But a collective pattern amongst many tenants suggests there are issues with the property itself. After all, why would so many people choose not to renew their leases unless there was a growing sense of dissatisfaction with the property?
Knowing the building’s tenant turnover rate gives you greater insight into the quality of the building. This information can help you determine if a property investment will yield the returns you anticipate from your investment strategy.
What is a good tenant turnover rate?
Obviously, a lower tenant turnover rate means more steady streams of monthly rental payments depositing into your bank account. Stable long-term monthly income reduces risk and increases the value of your investment.
In Canada, the national average tenant turnover rate in 2022 was 13.6%. This is according to data collected by the Canada Mortgage Housing Corporation (CMHC) in regards to all-purpose built units across the country.
Regionally, turnover rates are more varied. Lower tenant turnover rates were posted in both Eastern and Central Canada, as well as on the west coast in local markets like Vancouver. The highest turnover rates were reported in the four largest cities in Saskatchewan and Alberta, respectively, averaging near 30% in all four markets.
As you conduct your due diligence on new properties, keep those turnover rates on hand as you complete your analysis. Determine if the building you're investigating meets or exceeds the national or regional average in terms of open vacancies. If the turnover rate is too high, treat that as a red flag and consider investing in a different property.
What should you do when you experience tenant turnover?
Now that you know how to identify signs of healthy tenant turnover, let’s shift the focus to mitigating vacancies in your building. What should you do as an investor to recoup losses from tenant turnover and attract new renters to live in your building?
If you follow this checklist, you can address issues that contributed to a previous tenant exiting the property and confidently promote your building to new prospective tenants.
Perform any necessary repairs
The first item on the checklist is pretty much a given. When a tenant vacates a unit, inspect the unit and perform any necessary repairs to the door knobs, the cupboards, the paint, the lighting, and any other odds or ends. Make sure the unit is in pristine condition when you welcome new renters to view the listing to increase the likelihood of acquiring new tenants.
Check the HVAC system
This may not be limited to one particular unit. You should inspect the building’s HVAC system and verify that temperatures are comfortable when either the heater or the air conditioner is on. Comfort is one of the main reasons a tenant will renew their lease.
Verify the plumbing works correctly
Access to clean running water is vital to the health and well-being of your tenants. Whenever a new vacancy emerges in your building, it’s a great opportunity to test the plumbing and verify the quality of the water flowing through the building’s pipes.
Check for any leaks in the windows
Like clean flowing water, airflow is essential to protecting the health and security of your tenants. Use a new vacancy as an opportunity to test the window glass platings and verify no leaks allow outside air to circulate in the unit. Winters are very cold in Canada, so make sure the cold snap outside isn’t leaking through the window seals inside the building. This will also ensure you or the tenant are not over spending on utilities due to inefficiencies.
Test all the appliances
Tenants need a refrigerator that runs at appropriate temperatures to preserve their food. If you have laundry appliances within the unit, they need to work to attract new tenants. Use a tenant turnover as a chance to verify all appliances within the unit work correctly.
Test the smoke detectors
By law, all rented properties must have a smoke detector that works. When you have a newly vacant property, inspect the smoke detector and verify that it works. Sometimes, a simple change of the battery is all that’s needed to make the detector work correctly.
Consider repainting the walls
Go inside your newly vacant unit and inspect the quality of the paint job. Are there chips in the paint that lessen the quality of the finish? If so, take some time to repaint the unit with a fresh coat to help make it appealing to new renters.
Inspect and potentially replace the carpets
If you have carpet installed within the unit, a new vacancy gives you a great opportunity to inspect the carpet. It may be ruined by stains from the previous tenant, or it may have succumbed to simple wear and tear over time. In any event, if it looks like the existing carpet has seen better days, consider replacing it with new carpeting.
Clean the unit from top to bottom
After inspecting all the various appliances and amenities, it’s time to prepare the unit to display for new renters. Complete a thorough cleaning of the entire unit from top to bottom to prepare it for a new round of potential tenants to view. Don’t give quality tenants an easy excuse not to make your property investment their new home.
Change the locks
Most tenants willfully hand over the keys when they move out of a unit. But who’s to say they didn’t make copies of those keys? While it’s highly unlikely, give your new tenants peace of mind that theirs, along with your master set, are the only keys that can open the door to the unit. It just makes people feel more comfortable when they move into a new place.
Want help with tenant turnover? Join us!
As a property investor, you want to make money from your investment. If you’re investing in multifamily properties, you want to minimize your open vacancies and your tenant turnover rate. This is one of the most straightforward ways to maximize returns on your investment.
If you want more tips to improve tenant turnover at your property, join the ultimate real estate education platform at WealthGenius. We help investors just like you make the most of real estate investments, establish financial security, and gain the freedom that comes from building generational wealth. Join us today and network with like-minded investors ready to make a difference!
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