They like turnover

[Jeff S.]

Have had more time to network (recently retired from w2) lately and came across a different philosophy that is making sense to me.

Spent time chatting with 2 large property owners and both of these guys don't like long-term tenants because the apartment becomes outdated and the rent lags because of it. They like the turnover. I guess that since they are also property managers they enjoy the fees with the new tenants too. One guy owns apartments in several states.

Rents in Portland have been increasing dramatically so consequently my rents are really low. My last vacancy allowed me to increase rent by 20%. I could do that again but hard with existing tenants. For the first time I'd like to see some turnover.

My question is how do you feel about turnover? Is 5 years the max you like to see or do you like to let the tenant ride preferring not to spend on the turnover.

[Dave M.]

Congrats on retirement!

I like renewals, and usually I'll offer a good tenant no rent increase if they sign another year lease. Figuring that any rent increase from a new tenant will be offset by my make ready costs.

Now if I could increase rent by 20% that's a different story, I'm jealous!

[Jeff S.]

Dave Meyer that has always been my feeling too. Kind of shocked when the one says he gives them notice to move if they have been there a long-time. That seems cold but hey, it is business, right?

[Michael Lauther]

Jeff Price Long term tenants are profitable. they generally take care of your property, don't require excessive maintenance, and eliminate vacancy. Of course that may not make up for a 20% potential increase but you could build in say a 5% increase and that would keep your properties well under comparable ones with much less headaches. I do not see rent continuing to rise at 20% a year and if it does you will be able to adjust accordingly.

[Jeff S.]

Michael Lauther I also earned that increase. With many years of steady tenancy the place became surprisingly shabby. The improvement required it to be vacant. I actually spent a solid month working on it. Refinished 102 year old hardwood floors, new counter-tops etc. etc. It went from ugly to beautiful.

[Dave M.]

Originally posted by Jeff S.:

... it is business, right?

Absolutely! That's why I figure +$50/mo. or $600/yr is a wash (at best) if I have to re-paint.

Plus I always consider the risk of the unknown with a new tenant - that's my bird in the hand argument. But a 20% increase would easily offset both of those things.

[Joe Bertolino]

Build in an annual rent increase so you are never too far under market. They might complain about a 3-5% increase but most won't put down another deposit and incur moving expenses over a modest annual increase. You should never be 20% under the market.

[Steve Babiak]

Sounds like you were remiss in not increasing the rents over time to stay closer to market rent. You have to do that even with the long term tenants, and by staying just below market value you can tell them you are still offering a bit of a discount off of going rates. There are a number of approaches to the increase; property taxes went up, insurance went up, some utility that you might pay has gone up (maybe trash or sewer), can't risk losing IRS deductions for expenses by having rent too low, common area maintenance increased, etc. You might even offer to do some improvement as part of the increase to the rent.

[Jeff S.]

Steve Babiak you are right I have been remiss. Part of the increase though is due to the improvement that was done because it became vacant.

[Ryan M.]

We average 1k in turnover with lost rents and make ready costs, so retention is priority 1.

[David Beard]

It seems the right approach is to increase rents on existing tenants as leases roll over, keeping a bit below market to provide incentive for them to stay. It's also very inconvenient to move.

Turnovers are expensive. Not sure what you mean by their enjoying the fees from new tenants. Do you mean they make profits on the application fees?

[Ned Carey]

It seems pretty unanimous here - keep tenants, turnover is bad.

Turnover cost is one of the largest expenses for a landlord. Turnover is also work, showing the home, screening tenants etc.

If you are getting higher rents because you are spending money on renovations at turnover time, you are not getting higher rents because of turnover. You are getting higher rents as a result of the investment of money.

I wonder if these guys are justifying to themselves their poor management skills with these comments.

[Jeff S.]

David Beard they both are large property managers that do maintenance and repairs in-house so there is built-in work. When they rent out for others they charge a portion of the first mo rent upfront so there is the fee. All other fees are now illegal in OR. In addition to the fees they increase rents on improved fresh properties so their share of the PM monthly goes up.

If your tenant has been there 5 or 6 years (doesn't matter w/ sec 8 ) then your place is going to get ratty. If it is fresh and you are moving in a new tenant then it is worth more than one with old paint and carpet that is ruined after 5 or 6 yrs of use. If you raise the rents enough though tenants will naturally move out when the place gets tired and your rents are high.

In a strong market like we have you can do major improvements and change the type of renter you have. The one guy is taking his typical units that would rent for $900 and putting in tile, bamboo floors and granite counter-tops and then increasing rents to $1350. They are doing this with their own stuff and that of the properties they manage (with owners consent of course) and make money doing repairs and on the increased rents.

[Jeff S.]

Ryan M. one of these guys bought an apartment in Detroit that was 3/4 vacant. He lowered the rent by a 1/3rd and filled it. Both of these guys say there are times to raise rents and there is and will be times to lower them. Vacancy is bad in a soft rental market, you can't generalize and say just always keep raising rents.

[Dave M.]

Originally posted by Jeff S.:

When they rent out for others they charge a portion of the first mo rent upfront so there is the fee.

Looks like you've figured out why they like turnover

[David Beard]

Jeff -- Yes, as soon as it became clear that they manage property *for others*, then that changes the tone of things, sort of puts them on the other side of the fence in some respects. It points directly to conflicts of interest and non-aligned incentives that owners and PM's always potentially have (particularly those PMs running in-house maintenance operations from which they extract profit directly tied to the amount of usage).

You did qualify that by saying they're doing the same with their own units, and I can relate to the idea of trying to push your building into a higher rental tier, which will likely involve removing your lower-tier tenants who likely wouldn't qualify at the higher tier. This would be most effective with worn and dated properties in nicer or up-and-coming areas where there are other modernized units currently getting higher rents.

So sure, there is a point to their argument. But pushing to the higher rental tier does require a pretty good investment of capital, as Ned pointed out, quite a different thing than saying that turnover is good.

[Joel Owens]

It's all subjective on a case by case basis.

For instance one owner I know owns a multifamily complex of ranchers single story (over 100 units) on about 12 acres.

Over the years retail commercial has built up all around it.The owner hasn't raised rents in 3 years.90% of the community is 55 and older even though it is not designated for that.

The owner keeps it filled and does minor things to maintain it.Eventually it will probably be torn down and sold off for redevelopment.

Knowing that it doesn't make sense to really over improve it and increase the rents.When buying a multifamily building you have to look at many factors and where it is located to determine what your plan will be.

I like upping the rents slightly so that you get the increase but are still below market.As other shave said for someone to move and pay deposits and moving fees etc. they won't do it for a small amount.

It's like a restaurant upping a burger 25 cents.You won't be happy about it but will deal with it.Up the burger at once by 1.00 and many might look for another place to eat.

[Jeff S.]

Dave Meyer & David Beard This should explain why we welcome turnover right now:

"Portland is tied with Minneapolis for the nation’s second lowest vacancy rates at 2.5 percent. New York City ranks first at 1.8 percent, according to a commercial forecast released Friday by the National Association of Realtors."

I have had properties for over 20 years and never experienced anything like this. It feels the opposite as when places are hard to rent. When vacancies are high you dread turnover. The opposite is true when you can improve a place and maximize the rent.

It all works together. Tenants are willing to pay considerably more for a freshly updated property when it is hard to find a decent rental. Many landlords are trying to take advantage of people so new tenants are grateful to find a nice place. Having a vacancy so you can capitalize on that is awesome.

I am not a property manager but I would welcome my 4 other tenants moving out. This is not because I haven't kept up with the rents, it is because the best way to maximize rent is to vacate the property and redo it.

This just so happens to be a property manager's dream and aligns perfectly with their customers.

Have had places sit vacant for months and had to reduce rents. I know the dynamics of the different markets and you don't act the same in one as you do the other.

[Dave M.]

Jeff that's awesome that you are able to do that! Hope you get to ride that for a few years until all of your places roll over!

[Jeff S.]

Dave Meyer it looks like we are well on our way to having another credit bubble where anyone can buy. As the rents increase renters will again realize it is cheaper to buy. We are close to that now.

Buying where you are where housing pencils out seems better than here where 1% is unattainable in rents. Things are great for owners, not so much for landlords hoping to grow.

[Dave M.]

Jeff S. when I bought my place .5% was considered good here, I wish I knew better or ran it by BP before jumping in but such is life.

[Account Closed]

Originally posted by Jeff S.:

Buying where you are where housing pencils out seems better than here where 1% is unattainable in rents. Things are great for owners, not so much for landlords hoping to grow.

Jeff S. That's true for the Bay Area as well. Anything has a rent ratio of 1% get snapped up almost immediately. They even get snapped up at 0.75%. It's crazy. If you're buying into a more affluent area, the typical rent ratio is 0.3%-0.4%. :o)

Dave Meyer, Yeah, 0.5% hurts a little bit, but not too bad. It helps a little given the low interest rate environment. Hope you put a nice chunk of change down and could refi to lower your mortgage payment. Imagine the people that bought at the top of the market in the Bay Area with 0.25-0.3% rent ratio at 6%-8% interest rate. Ouch.

An investor bought a duplex near the top of the market for $720k. She put $360k down. In 2009, I bought one for $330k and one for $360k. Basically, her entire down payment is gone, and she still has a higher interest rate. She would have to bring in additional money if she wanted to refinance.

Good timing and some lucks make all the difference. Understanding the fundamental of investing really helps though.

Cheers.