Tenant Turnover Can Wreck Your Profits: Here's the Simple Solution to This Costly Issue

Turnover is when one tenant of a rental property moves out and the next one moves in, sometimes with time in between. Whether you own one rental or a thousand, A-class or D-class properties, one thing that all rental real estate has in common is turnover. Most, if not all, rental owners will agree turnover can be the biggest operating expense. A bad turnover can literally wipe out years of profit in a real estate investment. If turnover is something every rental owner deals with and is such a huge factor of investment success, don’t you think it would be a good idea to figure out 1) how to minimize turnover and 2) how to make it as efficient as possible?

When a rental property turns over, the owner has to fork up the cash to do all needed repairs and updating to the property to make it rentable and desirable again. This can include catching up on any deferred maintenance, cleaning the entire property, freshening up the landscaping, advertising the unit, answering inquiries, showing the property, screening applicants, signing leases, getting fees to property managers, and watching the days tick by as your property sits empty with zero rent coming in. It can be painful if you don’t know how to minimize this profit-draining event.

Why Am I Writing This?

Before I jump right into the how to of the article, let me tell you a little about why I am writing this and my own experience. When we first started in real estate, we bought C-class single-family homes to rent out. Like many, we didn’t want to pay the 8-10% property management fee, so we decided to self-manage. With our background in construction, my education in sales and marketing, my partner’s real estate license, our available time, and our desire to build a real estate investment company, we thought it will be good to learn how the process worked while also keeping our costs low.

All went well—we made mistakes; we adjusted and continued to grow. Like many investors, we hit a ceiling at about 20 units, where the property management began to take up too much time. It was interfering with continuing to grow the company and portfolio. Because of this, we took the typical route—we decided to start looking for professional property management companies to hire. The big difference was that we didn’t look on Google and call the sales department of the property management company. Instead, we looked on Zillow, Apartments.com, Craigslist, etc. We looked for listings similar to the properties we had, and we called the listings as if we were prospective tenants. We wanted to see how the property managers were actually handling the real world process of leasing rather than just hear from a sales rep in their main office.

The results were dismal. Phone calls were ignored and emails not responded to. We witnessed unprofessionalism on the phone and even blatant breaking of the Fair Housing laws. After weeks of bad results, we decided not hire outside management but instead took the processes we had learned and vertically integrated a management company and staff into our business to oversee our portfolio. I am pleased to say that with over 200 residents currently living in our properties and hundreds more over the years, we have never had an eviction and we have never paid someone to leave. We run between a 95-100% economic occupancy. And most importantly, we minimize turnovers and make them as efficient as possible when they do happen.

While reading this article, think of some of the landlords or property managers you know. Maybe if you self-manage your rentals, you can even self-reflect.

The reason we started to look for property management companies by calling listings as if we were prospective tenants is because we knew that the life blood of our investments was the customer service from our property management and our resident’s overall experience while living in our homes. What we found was other property management companies and landlords, especially in C-B class properties, obviously did not feel the same.

I don’t know if the term “landlord” makes people feel like royalty and like their tenants are peasants or what. In almost every other privately run company, the terms “customer experience” and “customer service” always are always in the topic of conversation, but hardly ever do landlords and property management companies even think of their residents as customers. Unfortunately, it’s more like “get them on the lease and hope you never, ever hear from them again.”

This is a huge mistake on the part of the average landlord—and a tremendous opportunity on your part. Business is business. Call them whatever you want—tenants, residents, customers, whatever—but these people are the life blood of your investment, and if their overall experience is good, they will stay longer. If it is bad, they will leave sooner. If their customer experience is good, when they do leave, they will typically leave with respect for your business.

So, How Do We Minimize Turnover?

This gets me started on my first key point. How do we minimize turnover? So often we hear more about how to make a bulletproof lease, as if the goal is to lock someone into your property. I have news for anyone renting out B, C, or even D-class properties: If your resident leaves, it’s usually not even worth the time and cost to take them to court to recoup whatever your “bulletproof” lease says they owe you. Even then, there is the strong possibility they don’t have anything to take. So rather than trying to lock people into your homes, why not make it so they enjoy renting from you, prefer it, and want to be there paying for the product and service you provide?

You do this by creating a positive customer experience for your residents. Every other industry has this figured out, but for some reason, we royal landlords can’t get this. Even hotels and high-end rentals are pros at customer experience. Think about the last hotel you stayed in. If you checked in, signed the papers, and went up to your room to find a flickering light bulb, TV remote batteries missing, and a chirping smoke alarm, you would likely call the front desk. If they didn’t answer the phone or told you the paperwork you signed says that they don’t have to fix that, do you think you would be hanging around for long? Of course not. You’d walk over to the next hotel. Now, if those issues never existed or were promptly addressed, you would continue to stay at that hotel. Your rental property is no different.

This shows us that the answer to how we minimize turnover is simple. All we have to do is create a good customer experience for our residents. The million-dollar question is how do you do that in a financially feasible way for your investment and/or company?

The good news is that the typical management company or landlord has set the bar so low that it doesn’t have to be extremely time-consuming or costly to provide a customer experience that shines brightly above all others and leaves your residents knowing they are important.

Here are few ways you can make a big difference to your resident’s customer experience.

1. Welcome Gifts

So often after the lease is signed, the vibe often goes to “gotcha,” and those in charge of property management think their job is done. A very simple way to start your customers’ experience off on the right foot is a welcome gift. We can get this done for under $10 while also having other positives. You can even brand your company and build rapport with your residents.

Let me get specific. It’s a little cheesy, but place items in the unit before the resident moves in and put little tags on them with phrases. Some examples would be placing a few bottles of waters or sodas in the fridge with tags on them that say, “It’s so refreshing to live in a [your company name] property.” Or place a bag of candy on the counter with a tag that says, “It’s sweet to have you as our resident!” Or leave a plunger in the bathroom with a tag that says, “Stuff happens. If you have a maintenance request, call 555-5555 to schedule a [your company] trained maintenance tech to assist.” Or you could put a dog bone out for your residents with pets that says, “[Your company] even loves our furry residents.” We have many more, but you get the point. These are very minor things that cost so little but can start the customer experience off on the right foot and get you on your way to minimizing costly turnovers. I would rather spend $10 on this than $3,000 on a turnover.

2. Quarterly Checks

Going into your property a few times a year to check on things is a must! You have to keep an eye on things, but instead of busting in like a S.W.A.T. team and pointing out everything that’s wrong, why not check smoke detectors and change furnace filters while you are there? You can call it “quarterly safety and energy efficiency maintenance.” While you or your staff is there, compliment your resident on something—how the unit is kept, the nice picture of their family, the newer-looking couch. Even ask them if there is anything else you can do for them. These are not groundbreaking tips, but for some reason, the norm is more like a quarterly raid.

3. Anniversary Presents

What do most landlords do when their resident’s lease is about to expire? They send them a notice to renew the lease or call them and notify them of their contractual obligations for notice.

What if instead you sent them a letter at month 10 of a 12-month lease that generally says, “Can you believe it’s been 10 months? Time flies when you’re with people you like. To thank you for being one of our favorite residents and ensure we are continuing to provide the best living experience we can for you, we would like to celebrate your (XX) year anniversary with a gift. Feel free to select one of the following items, and we happily take care of it on (xx/xx/xxxx)”? This date will land shortly after their anniversary (lease expiration). After they make their selection of gift, then follow up with the new lease. The point is to make the lease another positive of living at your property, not a bulletproof contractual jail cell they will have to abide by—or else.

Those anniversary gifts can be whatever you want, but we offer items that add value to both us and our residents. A few specific examples are:

“You work hard. This week, let us take care of the housekeeping. We will hire _______ cleaning company for a whole home professional cleaning on us.”
“Feel like the carpets need a refresher? We will have your carpets professionally cleaned by ___________.”
“Smudges and dings driving you crazy? Let us help you out and repaint one room of your choice.”
“We’d like to offer you $X off your month’s rent for the month of __________”

You get the point. Or if you don’t want to be self-serving, you can simply give more gifts like a gift card or the $X off rent, etc.

Another small tip would be to include on the list what the anniversary gifts are for 5 or 10-year residents. It could be things like appliance upgrades, full home painting, new flooring, etc. This will have residents already thinking of year 5 and 10 at your properties. Of course, this is all relative to your resident base. We own C-B class properties, so this list is appealing to our residents who may not have the luxury of having a professional cleaning company ever clean their home. Do what fits your business and your residents, but the point is that lease renewal can be a fun thing—something exciting, something that even builds your resident’s positive customer experience.

These are just a few of the unique examples of how to build a positive customer experience for your residents and minimize turnover. There are of course many, many more, including more obvious examples such as being responsive to maintenance requests, upkeep common areas, etc.

By keeping customer experience in mind, you will minimize turnover and as a result, increase your bottom line.

Turnover Happens

No matter how good you are at creating the best customer experience for your residents, you will have turnover. Life happens, people have children or children move away, jobs transfer, and so on. Still, all you have done to give a good customer experience will even pay dividends at this time. When residents have been respected and respect their landlords, they are far more likely to give adequate notice of moving, not break leases, and leave the property as clean and rent-ready as they can.

Even then, turnovers can be expensive. There is still a time where that unit is not making income, and you still have fixed expenses on it. Normal wear and tear and outdatedness will need to be upgraded or repaired. You’ll likely need to clean, list, and show the property, as well as screen and sign new tenants, which all takes time and money.

Because this process is inevitable if you rent out property, it’s a good idea to get as efficient at it as possible. Get your timing down to a rhythm, know who does what and have them scheduled, get the right materials there at the right times, and get the unit filled to produce income as soon as possible.

Although we are a little fanatical about making our turnover efficient (and this may be overkill for many), I will share one piece of our turnover process to help show how you should be striving to cut down on lost income and expenses. In our company, we have what we call our “turnover checklist.” This has been evolving for years and is now in app form (sorry, everyone, the app’s not for sale). Our managers can walk around a unit with their tablets and are prompted room by room to address specific items and check to see if they are needing to be repaired or replaced—or whether they are clean and good. If they click “replace” or “repair” for a specific item a comment box, it offers them an option to take a photo, annotate the photo, and select out of a preloaded list the correct material items that fit that specific unit and item.

For example, if you were in the bathroom of our Spring Valley apartment unit #1 and you selected that the door needs to be replaced, it would prompt you to select the needed materials, which are pre-loaded for our specific company property and unit. This means because you are in Spring Valley apartment unit #1 in the bathroom, we know that is a 30” left-hand swing six-panel door. So this would be your only option. Once the door type is selected, there is a prompt asking if you need a doorknob, hinges, a door stop, or any other corresponding material needed for this task. Think of it as Amazon where it says “People who bought this also bought this.”

After walking the entire unit, the manager clicks submit, and automatically our maintenance tech receives a detailed scope of work, the corresponding material list, and a schedule indicating when the repairs need to be made. Our Home Depot rep receives a materials order with all prices and SKU numbers included, as well as needed delivery date and time (inputted by the manager). A list of materials gets sent to the bookkeeper to make sure he is pushing forward depreciation on any capital expenditures we may have replaced during the turn. And finally, all of this gets auto-saved into drop box under that specific property and unit folder for reference.

Now, this is overkill if you have a few properties, but because we invest in large multifamily properties where lots of units can be identical, this makes us extremely efficient in our turnovers. We’ve cut down on our communication errors, trips to Home Depot, and time that units stay vacant. I realize this level is not practical for everyone, but I share our system to inspire those of you who use a simple checklist to figure out ways to make this process more efficient so when your units do turn over, you can boost your bottom line significantly.

Turnover and vacancy are some of biggest expenses rental investors pay. Many times, they can make or break an investment. The good news is if you know how to minimize these things through customer experience and operational efficiency, when they do happen, your company will thrive.

Landlords: How do you keep turnover to a minimum? Do you focus on customer service or another aspect of your business? Why?

We’d love to hear your experiences—leave a comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.