For rent: The true cost of vacancy

Don’t forget about these common vacancy-related expenses

Are you looking for another reason to buy a rental property? Add this to your list of benefits: It’s a good time to be a landlord.

In 2014, vacancy rates are decreasing, rents are increasing and there’s strong demand for rental housing.

US Census data tells us that:

• The rental vacancy rate was 8% in fourth quarter 2013, dropping from a high of 11% in 2009. That means fewer rental properties are empty.
• About 35% of households are renter-occupied. That means there’s a huge market for rental properties.
• Rental rates rose by 3% in 2013. That means renters are paying more.

The flip side of the story is that rental properties naturally have turnover and vacancies. Even in strong markets, renters move for many reasons, including new jobs, new places to live and new opportunities.

While a strong rental market is positive news for investment property owners, it’s still important to factor the impact of vacancy into your investment property evaluation. Vacancy means lost rental income, along with many other costs to maintain and transition a rental property.

Lost Income

First, vacant properties don’t generate rental income, pure and simple. Investment property owners generally use rental income to cover property expenses, such as mortgage payments, taxes, insurance and other costs. Without rent coming in, property owners will have to manage cash flow and cover expenses from other sources.

Utility Bills

Second, investment property owners will have to pay for utilities that are often covered by renters. This could include electric bills, gas or heating costs, water bills or other local services.

In rental units, light and temperature matter. Homes and condos show much better when they’re comfortably heated or cooled. During showings, prospective renters like to see bright, well lit spaces. By making your rental look its best, you’ll increase its appeal.

Rentals without power can seem drab at best, or desperate at worst. It’s wise to keep utilities turned on, or prospective tenants may be literally turned off.

Leasing or Advertising Fees

Third, you’ll be faced with expenses for advertising and leasing. Many owners hire a property manager to advertise the property, conduct showings and lease the home to new tenants.

Fees for property managers typically run from one month’s rent to a negotiated percentage of rent. The fee varies, depending on whether the property manager provides ongoing management or one-time leasing service.

For owners who do their own advertising and leasing, factor in your time and expenses to place ads, do showings, process applications, run background and employment checks, and take care of other activities to get new tenants in place.

Maintenance and Repairs

When renters move out, they leave behind many things. This ranges from the expected, such as scuffed walls, nail holes, dirty floors and greasy stoves. The unexpected can include abandoned furniture, missing fixtures, dirty laundry and more.

In most cases, property owners will spend money on cleaning and turnover fees – like carpet cleaning, painting or house cleaning services – so the property shows nicely.

In other cases, it can get worse. Imagine having to repair broken appliances, get crayon marks off the wall or patch holes. Talk to anyone who’s managed rental property and they’ll have stories to share. Security deposits can be used to cover damage, but sometimes it’s not enough. In other cases, like faulty plumbing, it’s the landlord’s responsibility.

Upgrades and Improvements

On the bright side, a vacancy can be the optimal time to make planned upgrades to rental homes.

Smart cosmetic upgrades, such as new kitchen or bath faucets, light fixtures or ceiling fans, will update a home and help set it apart from other rentals. They’re also a sign the owner cares about the property’s condition.

Vacancies present an opportunity to make bigger changes, such as installing new flooring or countertops. These changes can be disruptive or nearly impossible to make with a tenant in place. But ultimately, they can increase the value and appeal of a rental home.

Bottom Line

Vacancy is a fact of life for rental properties. Experienced property investors plan for vacancies to minimize impact on income and cash flow.

To keep your investment property occupied, make sure your rents are competitive and your property is in good shape. Maintain a reserve fund to cover unanticipated expenses.

And when buying a new rental property, always consider the impact of vacancy in your investment property evaluation.