How long will it take my property to rent?

Question

Recently, my family added a duplex to our investment portfolio. I was super excited about it because it's only 10 minutes from my house! I ran the comps for the neighborhood and saw that there wasn't a lot turnover during the past 3 years. Maybe 5 comparable units within 1 mile. It looked like, worst case scenario, each unit would take about 27 days to rent.

By day 15 I had already pulled out every marketing tactic in my arsenal. By day 60 I was hyperventilating because I had not forecasted the need for 3 months carrying cost into my numbers. In the end they took 64 days. I was flummoxed. I'd never been so wrong before on rental forecasts. Why?

So like any good wonk, I started pulling hard numbers from the MLS for Williamson, Travis, and Hays (WTH) counties. Below are my WTH graphs that give a far better idea as to the nature of the Austin area rental market than anything I've seen before.

Comparing the total number of leases signed during any given month clues us into the drastic seasonal market shifts that take place in the Austin Area. Lease volume almost doubles between the peaks and troughs of the pink line. So does the average cumulative days on market (CDOM). The effect gives the appearance of a fairly well balanced phased wave. I don't have anything else to compare this type of analysis to but my gut says this is a good healthy market devoid of any systemic anomalies.

If you'll note the trend lines above, you'll see more and more leases are signed every year and that average CDOM is on the decline.

Average CDOM in Austin by # of Property Bedrooms

Now let's break things down further by examining the effect property size has on CDOM. My duplex is a 2/2 mix. Based on this WTH I should have forecasted an average lease time of 58 days instead of the 27 I guessed because we went to market during the slowest time of year. As you can see by the pink line, 2 bedroom properties take the longest to rent on average and don't benefit as much from Austin's extreme real estate seasonality.

3 bedroom rentals (green line) are by far the most consistent property leased in Austin. But the demand for 4 bedroom properties is increasing faster than any other property type. Based on the trend lines, it appears that demand for 4 bedroom leases will surpass 3 bedrooms in 2023. I'm forecasting accelerated appreciation for 4 bedroom houses in the Austin area as a result simply because there are there are half as many 4 bedrooms available in our rental market as 3 bedrooms. This will drive up the rent that can be charged for 4 bedrooms.

In summary, assuming Austin's appreciation game survives the COVID-19 virus, my next property will be a 4 bedroom rental. How do y'all interpret this data?

Which property sizes do you think rent the quickest?

Jordan Moorhead · Answer

It's price. I had the same issue, then I lowered the price and rented quickly.

Patti Robertson · Answer

@Beau Fannon - Don’t over complicate this. The reality is most people move in the summer, and the majority of people moving in the winter are moving because they HAVE to, not because they WANT to. We had more fake pay stubs and discrepancies on applications vs. civil court records than ever this winter. Applicants can literally to on-line and buy fake paystubs and an employer verification, just like you can an emotional support animal certification, and they do. The majority of applicants we screen in winter months are people being evicted from other people’s houses. The exceptions for us are military and SEC 8. Military tends to move people around in Dec/Jan. To combat this, we do something similar to @Stephen Stokes, except we stagger our leases. We tell applicants right up front on our application that we don’t end leases between Oct - Feb. We choose a lease ending date based on the other lease ending dates in a multi-unit, or within an investors portfolio. We allow applicants to choose the month their lease ends, as long as it isn’t between Oct - Feb, the lease term is 12 months, and it fits within the owner’s other lease dates to create balance. This practice minimizes the number of vacancies a landlord has at any one time, although nothing eliminates this risk, because this is still a people business, no matter how well we plan. Again, the exceptions to this are military and SEC 8. We try to coordinate a military member’s lease dates with their orders, and a SEC 8 initial lease has to be for 12 months. The SEC 8 lease ending date can be reset to a more favorable month at renewal.

Beau Fannon · Answer

@Joe Scaparra if memory serves, you've mentioned that you bought several of your properties way back 2013. To generate positive cash flow on a new purchase, commanding top dollar is a must. Sounds like a little TLC could really boost the income your property generates. You ready to sell your duplexes to me?

Stephen Stokes · Answer

@Beau Fannon I recently experienced something similar with couple of my rental units and can attest to the 3 vs. 2 bdrm. demand delta. I also recently listened to one of the BP podcasts where the guest was buying up 3bdrm properties with basements that fit his local criteria to be converted to inhabitable additional bedrooms. Then, he was marketing to Section 8 -- 4 bedroom voucher holders as his target market. What he found is that there was such short supply and demand was so high that he could be VERY picky about who he leased to and mentioned receiving 10's if not 100's of applications. He even talked about going to the extent of requiring the applicants to allow him to personally visit the applicant's existing home as part of the application process. If we tried to do this in Austin or even mentioned it on an application form, I doubt we would ever get any applicants (HA!). Just goes to show how much different demand can be for what is in short supply. I tend to agree, I see a shortage of 4bdrm units and my single family 4bdrm/3.5bath rents extremely quick. To avoid the seasonality, I have slowly but surely been doing my best to move my leases to end in July. While I did not have the data you so eloquently plotted out for us in your post, I have been aware the underlying contributing factor; school. When you move into your first apartment in college, you likely are forced in most college specific areas to start the lease in August (typically on the 15th) which ends July 31. This starts the renting cycle for most renters and they typically stick to that same cycle.

Robert Eyers · Answer

I tend to agree with Jordan.Beau, your analysis and graphs are always fascinating to me and I love reading them. Great insights.However, I find that MOST tenants start by looking at price. if you have a pool of 10 different 3/2's within a 1/2 mile of where the renter is looking, its a safe bet that the one that is discounted by $100 will rent in less than 2 weeks and the one that has a $100 premium will be on the market for 3 months while more inventory gets posted and rented. I'll give you an example conversation I had with one of my owners last week. She wants to rent at $1300 (I discounted the numbers to make the math simple here), which is about $50 above the comp set. I told her to post at $1200 (again, discounted to make it simple). The home might rent for $1300, but it will take a month longer to find a tenant that likes it enough to pay a premium. Meanwhile, if we had posted it at $1200 originally, we would have had that money in hand within 2 weeks. By losing out on that one month of rent ($1200), it will take her a full year of collecting the $100 extra that she was insisting on to break even.It takes even longer to make up the difference when we talk about higher rent, and the problem compounds if the unit stays off the market for longer than a month.

Marian Smith · Answer

@Beau Fannon I am now asking for 60 day notices to match what replacement tenants have to give. The good local ones are looking 2 months out. It seems to me....I don’t have charts, etc. (very impressive).

Joe Scaparra · Answer

@Beau Fannon, I have been buying since 2002 and have yet to sell any my friend. Don't know where the TLC comment you refer to as I am confident that my properties are the best on the block. Ah, that might just be why I have very little turnover and my rent so fast when I do have a vacancy. Yeah, if buying now requires generating top dollar to generate positive cash flow then just maybe it might not be a good investment if cash flow is the goal. I'm still finding 1% deals on the outskirts of Austin, but yeah in Austin proper as a pure investor I'm having difficulty finding positive cash flow opportunities. As far as me selling, as soon as i or my spouse dies we'll be selling. The step up in basis means tax free gains and again I'll take advantage of the rules in which we are bound. Until then, I'll just have to keep counting the $$$$. Cheers.

Joe Scaparra · Answer

I am glad to tell you my experience is NOT at ALL like yours. My properties in Austin are 2 bedroom 1 baths and I strive for one day turnovers. Yeah you got that right 1 day turnover if I have a 30 day notice to vacate. I think the best rental property for the buck is a 2 bedroom 2 bath duplex. All mine in Austin are 2/1 and that is fine. Maybe you shouldn't try for top dollar. For example 1 Aug I had a tenant up and move no-notice. I was able to have a lease in-place 15 Aug and I had a $50 increase in rent. The duplex is in East Austin, 750 sq ft and it now rents for $1250 per month. I think I could possibly get $1350 but that would be top dollar and I may be vacant for a few weeks. Rental market for duplexes is extremely hot!!!!! I have 10 units spread out in the Austin MSA and I certainly don't go more than a month vacant, but even at that if I am given 30 days notice it is ONE day. If anything, I discount the first months rent by $75 if the unit is dirty. Cheers