Although there are many costs associated with owning investment properties, it’s important to know all of them in order to get the most return on your money. While you need to account for any additional costs of fixing up and managing a property as an investor, you should also consider vacancy costs. Failure to factor in costs of a vacant property could result you working harder to break even on a rental home.
What is the definition of vacancy costs?
When there is no tenant living at an investment property, you do not have any cash flow from rental payments, resulting in you losing money for every month a rental home is vacant. Although there are costs associated with having rental homes unoccupied, declines in vacancy rates for rentals have reassured investors that investment properties are good buys. According to the U.S. Census Bureau, the national rental housing vacancy rate dropped 0.7 percent to 7.5 percent in the second quarter of 2014. While it might take time to find tenants, you may not have to wait long if you prepare to find new tenants before your properties become vacant.
What determines vacancy costs?
After you renovate a property or have to find a new tenant, you will need to factor in vacancy costs for the amount of time it will take to fill a property. When you have just bought a property, add up the time it takes to renovate the house and make it ready for tenants. Depending on the signed contract with the tenant, you may have higher vacancy costs over the long run. The shorter the lease, the more likely you will accumulate vacancy costs to find new tenants. For example, you might have more costs if you approve a contract for a six-month lease compared to an 18-month lease or more due to higher turnover rates for tenants.
Why Is keeping track of vacancy costs important?
Investors need to make occupancy of all their rental units a primary priority in order to maximize their cash flow. When you go in to buy a property, have a rough draft of your financial plan, write down the vacancy costs and determine how much you will need to charge each month to make up for these costs and any other expenses that may come up when owning the property.
In keeping track of vacancy costs, you can also prepare ahead of time before you know a property will be vacant in order to start marketing a rental home in the area to potential tenants. If you know a lease is about to expire in a month or two, you can begin forming a game plan for advertising the property using different outlets and deciding whether to make minor renovations to get the place move-in ready for the next occupants.
With the high cost of vacancy, investors should consider how they will limit turnover on a property through choosing the right tenants and making sure to work with an experienced real estate investment firm.