Every landlord knows that tenants don’t last forever. People will be moving out of your properties from time to time. So you’ve got to have a strategy in place for refilling vacancies in the shortest period of time possible; minimizing that ‘void period’ when your property’s empty and collecting zero income.

Is that all? Afraid not. Void periods might seem like your worst nightmare, but departures also introduce another problem: tenant turnover. This is a state where you’re having to recruit new tenants too often — your bottom line will suffer even if you do manage to shrink the void down to a minimum. Let’s see how tenant turnover can erode your bottom line, and what you can do about it.

What is Tenant Turnover?

The term “tenant turnover” is often applied to the time gap that separates two consecutive tenancies. But strictly speaking, that would be a vacancy – turnover is the process of recruiting a new tenant after a current one leaves. It’s the whole cycle of terminating a lease, getting the unit ready for letting, and signing on a new tenant.

Tenant turnover can be just as damaging as a vacancy, but it’s important to distinguish the two. A vacancy is expressed in standard figures (2 weeks, 3 months, etc) referring to the time it takes to recruit a new tenant. On the other hand, turnover is expressed as a percentage; it’s measured by calculating the percentage of tenants who leave in a given period. An extended vacancy would indicate that you’re having trouble recruiting, while a high turnover rate means you’re not retaining tenants long enough.

But just how long is ‘long enough?’ Some local studies indicate that the average length of a tenancy in Birmingham is just over 3 years. Still, you don’t have to sit that many months to determine if you have a turnover problem. You can easily tell by looking out for these warning signs:

-Early non-renewal notice(s): A renter can express the intent to move out when their lease expires for any number of reasons; perhaps they’ve changed jobs, acquired their own place, or just want to sample life elsewhere. But it’s a huge red flag when a tenant hands in a notice for non-renewal without any prior communication, and then another one follows suit. Such decisions are often prompted by unaddressed problems. And once a tenant makes up their mind, they immediately check themselves out of your property — which means they aren’t inclined to look after it. That translates to higher costs when it comes time to turn it over.

–Low renewal rate: Let’s go with local figures once again; just over 50% is an approx yearly retention rate for rentals in the Birmingham Alabama area. That means more than half of renters opt to renew their leases annually (for at least another year). So if you’re losing more tenants than you retain over a 12-month period, you have a problem with turnover.

–Constant complaints: You might not have a turnover problem as yet, but if complaints keep coming your way, take that as a red flag. A dissatisfied tenant is not only likely to leave, but they could also sow discontent among others. Complaints can be especially damaging if they’re coming from ‘veterans’ — renters who’ve been with you for a while.

-Lack of formal management systems: Your tenants expect you to run things in a controlled fashion, with established systems for all processes (rent payment, interaction, problem resolution, etc). Without this sense of orderliness, don’t be shocked when they start moving out in droves. Even if that’s not the case, things could always change when a new generation comes around.

Calculating The Cost of High Tenant Turnover

Tenant turnover can be devastating, to say the least. Your cash flow immediately takes a hit when a renter terminates their lease, and who knows how long it’ll take to find a replacement? A couple of months? Or perhaps a few days if you’re lucky. Either way, turnover brings the prospect of losing a substantial chunk of your income, all while incurring these out-of-pocket costs:

-Cleanup: Stained carpets, dusty blinds, dirty window panes… there’ll always be a few messes that need cleaning up whenever a tenant departs. Even if they were conscientious enough to do their part, you’ll still need to get the place ready for showings and keep it clean in between.

–Repairs and maintenance: The gap between tenancies is arguably your best opportunity to catch up with repairs and maintenance. The outgoing renter’s deposit will step in for any damage they might have caused, of course. But you’ll have to foot the bill for everything else — in essence, any fault they’d highlighted during their occupancy. Not to forget the cost of bringing the place up to date (refreshing the paint, upgrading old fixtures, etc). And the locks will need changing as well.

-Marketing: You can’t expect to attract serious prospects using free online ads and offline referrals — at least not every time. You will need to supplement with a few paid ads, or even go old school with flyers and signs. These costs can burn a hole in your wallet when your turnover rate is too high.

-Showings: Any potential tenant worth their salt will want a tour of the place before you can start discussing background checks and lease agreements. Again, you might not incur any direct cost here if you’re going to coordinate the showings yourself, rather than hire someone else. But time is money; you’ll still need to put in a chunk of your own time, and that equates to money lost.

-Application processing: Every application that comes in will need to be verified to the last detail. That means obtaining credit reports, rental histories, and conducting background checks, all of which need to be paid for.

-Onboarding: You’ve managed to land a qualified candidate, but there’s still work to be done. Getting the lease drafted, signed, and helping the tenant move-in will all cost your time/money.

Now, there’s no denying that turnover is an inevitable part of the business; people move on every now and then. It’s thus important that you budget these costs into your balance sheet. That way, you’ll be able to see when your cash flow suffers as a result of excessive turnover.

Still, the effect of high turnover is pretty straightforward. Consider a $1,000-per-month rental that costs $300 to refill following a departure (advertising, showing, and screening), with cleaning expenses amounting to $100. A single turnover would exact a 3.3% penalty on your annual earnings — and that’s if you’re able to re-let immediately. Otherwise, a month-long vacancy will introduce a $1,000 opportunity cost, taking the bleed rate to 11.67%. That’s high enough to diminish the overall return you stand to reap from your investment.

Getting a Grip on Your Turnover Rates: What Can You Do?

You’ve done the math and seen how excessive turnover can threaten the profitability of your investment. What do you do to bring it under control? As we hinted earlier, high turnover is a symptom of a less-than-stellar tenancy experience. If renters are always looking to move out at the first opportunity, it means you’re not holding up your end of the bargain. You will need to pull up your socks if you’re going to bring the turnover rate down to an acceptable level:

-Be proactive: This means admitting that there might be issues that make your properties unappealing, and going out of your way to identify and fix them before any complaints come your way.

-Make improvements: Don’t just focus on fixing problems; look for opportunities to make improvements. For instance, an HVAC unit that breaks down constantly could be crying out for a modern replacement. Make the upgrade and your tenants will hardly doubt whether you’re concerned about their welfare. If anything, they’ll be more apt to put up with a slight rent increase for the progress.

-Cultivate relations: You don’t have to be cordial with everyone, but at least try to show that you care about your tenants. Provide prompt feedback for any questions or issues they bring up, and always keep your communication channels open.

An inexplicably high turnover rate doesn’t always mean you’re letting your tenants down. It could also suggest the need to rethink your management policies:

-Take screening more seriously: Maybe you’re recruiting tenants who cannot stay put anywhere, good or bad; prospects with a history of non-renewal will inevitably push up your turnover rate. As will an individual with a tendency of causing their neighbors misery — bad tenants always end up driving the good ones away.

–Be fair with rent increases: Your interests and those of your tenants won’t always be aligned, but it behooves you to be a little more considerate for the sake of yours.

-Modernize: A cutting-edge property management platform can go a long way in streamlining your processes, thereby making life easier for tenants.

Let Us Help You Turn Pain Into Profit

At Specialized Property Management Birmingham, we’re well-versed in the art of screening candidates and picking out the best tenants for your rentals. With our services, you have to worry about high turnover eating into your profits — or even the everyday property management tasks. Reach out to us today and let us take the burden off your shoulders! Call 205-417-1475 or contact us online!