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Property Management Blog

Costs of Having a Vacancy

Kerrick Hutchison - Thursday, January 29, 2015

When it comes to owning and managing a rental property, there is no single expense that will cost you more money over a long-term hold than vacancies.

The below examples are from personal experiences we've had.

Highest Rent vs. Occupancy

I've seen it happen too often where an investor wants to get the highest rent possible while forgoing having the property occupied with a tenant paying a rate just below market.  Let's look at the costs of holding out for a higher rent.

Rent wanted - $1,000
Market Value - $950
Advertised rent - $925

On average we have seen homes stay on the market 30-90 days longer while trying to obtain the highest rent possible.  Therefore, if we could rent the property for $925 today, or $1,000 in 3 months, you are foregoing $2,775 in rental income by waiting for the $1,000.  That's losing $31/day.  And that is just the rent loss.  During these 3 months you are paying approximately $300 in utilities, another $100 or so for cleaning because it's vacant, $100 or so for lawn maintenance, and let's not forget property taxes and insurance.

When it's all said and done, that's approximately $3,500 lost while waiting for the $1,000/month rent.  It is usually best to attract a quality tenant at a great price than wait for a so-so tenant at a high price.

Stigma of Days on Market

When agents and/or prospects see that a property has been on the market for a long time (60+ days for a rental), they usually ask what is wrong with the property before even previewing it.

Just like a property for sale, having a high days on market (DOM) count can tarnish a property.  People automatically assume there is an issue with it...that's why no one has scooped it up yet.

In addition, there are two parts to the equation when it comes to higher rents for a given property (higher than market value, not expensive rent).

If the rental home is perfect (no issues, great location, etc.), it attracts the highest quality tenants.  People want to live in a well cared for home.  And they will pay top dollar in a high demand market to get a home like that.  But if the home is subpar (outdated, defects, doesn't show well, etc.), in most cases, the only people who will pay above market rents are those who have application issues (bad credit, background history, etc.).  They are willing to pay a premium to have a chance.  It's similar to having bad credit, getting a car loan, and paying 20%+ interest on that loan.  Longevity of DOM usually disinterest the quality tenants because they automatically think the property has issues and/or know it's over priced (reason for being on the market so long).

Now, not only has the investor lost money by staying on the market waiting for the rent desired, but they risk the chance of getting a sub-quality tenant.  The risks of quality tenancy decrease the longer the property stays on the market.

Conclusion

Nothing costs you more than a vacancy.

It's important to make sure your home is well taken care of and priced competitively so it attracts the best tenants and makes you money, not costs you money. 



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