Other than perhaps property taxes, turnover is generally the biggest single operating expense you will endure as a buy-and-hold real estate investor. And unlike property taxes, it’s something you have a lot of control over.
Getting turnover right can both increase your income and reduce expenses. It can quite literally make or break your ability to have positive cash flow.
Reducing the Need for Turnover
First and foremost, the idea that tenants renewing their lease or moving out is something you can’t control is a myth. Sure, you can’t control it, but you can definitely influence it.
The goal here is to move the dial and increase the likelihood a tenant will renew their lease. The law of large numbers states that if you can increase the likelihood of a renewal of any given tenant over time with enough tenants, you will increase your renewal rate substantially.
Sure, if they get a job out of town, they’re going to move out. But if they are moving because of too many maintenance issues, that’s something you can (or at least could have) fixed.
Think of it this way: Let’s say your average vacancy is two months between tenants (turnover and time to lease). If you have a move-out every year, that would amount to a vacancy percentage of 14.3%; two divided by 14 (12 months tenancy, plus the two vacant months). Right off the bat, you increase your income by over 7% and reduce expenses to boot.
If you can bump that up to two years, vacancy halves all the way down to 7.7% (2 divided by 26). At three, it’s down to 5.3%, etc.
The most important thing to keep in mind is that fast, quality maintenance and good communication are by far the best forms of customer service a property manager can provide. And yes, you should think of your tenants as customers or clients. Think of quality maintenance as a tenant retention strategy.
You should also be proactive in seeking to get a tenant to renew. In the past, we have offered “lock-in” rental rates for renewing six months in advance. (This is when we had a glut of rehabs and didn’t want to add any more to our plate.)
Nowadays, we reach out to the tenant two months before the lease is set to renew with the new lease price and ask if they intend to stay. If they say no, we ask why, and occasionally, we can sway them if there had been a misunderstanding—for example, a lingering maintenance issue that hasn’t been addressed and they didn’t bother to call about.
We don’t have time for a deep dive on lease renewals, but it’s definitely worth picking up a copy of Jeffrey Taylor’s The Landlord’s Survival Guide, which has all sorts of tips on getting tenants to renew. The average tenancy in the United States is about three years. Ours are between four and five. His is over six.
If nothing else, offering a small reward like a gift card to their favorite restaurant (ask when they initially sign the lease) helps. Robert Cialdini notes that creating a sense of reciprocation is one of the best sales tactics out there, even if the items being reciprocated aren’t anywhere near equal in value (like a 12-month lease versus a $25 gift card, for example).
Sprinting Out the Gates
Even if a tenant does decide to leave, that doesn’t mean all is lost. We have offered any tenant who is moving $10/day to be out early. We recently upped that to $15/day for apartments and $20/day for houses.
Even if they move out of a house a full month early, that’s only $600, whereas our cheapest house for rent is about $1,000/month. If they take the money, it means we get the unit back early and can get started on the turnover and leasing at a discount.
The same kind of thing can be done with evictions, at least some of the time. I highly recommend offering cash for keys to tenants who won’t pay to get them out without an eviction. It’s better for them (having an eviction makes getting a new place very difficult), it saves on eviction costs—and depending on the state, storage costs—and most importantly, time is money. It’s definitely worth paying a few hundred bucks to get them to leave early so you can get started on the turnover ASAP.
You should also make it clear to any tenant that they will be charged every day until you get possession of the unit (i.e., keys in hand and right to enter). You should also make sure the utilities get transferred back into your name the day they leave. (Many utility companies will automatically transfer into the landlord’s name if you set it to auto-revert, which is worth doing.) Don’t let the power, gas, or water get shut off, as this will simply add time, and thereby costs, to getting the property back on the market.
If you have a decent number of properties, it would also be worth staggering lease end dates so they don’t all come due at the beginning of the month. This prevents a glut from forming and costing extra time before being able to start the work. It’s critical to remember that with turnover, time is of the essence.
Contractors or Employees?
The next big question is whether to use contractors or employees. If you have a small portfolio, it won’t be enough work to keep an employee busy, so you should go with contractors. On the other hand, if you have an apartment complex with onsite property management, I would definitely recommend having a make-ready crew on site. It’s just so easy for them to get to and from a job site.
You should still have relationships with contractors as a backup, of course. And you should also have specialists like plumbers, electricians, and HVAC technicians ready to call.
If you use offsite management, I think you can go either way. The big thing about employees is that you really need to stay on them. Every extra hour costs you. You don’t want anyone who’s thinking speed isn’t essential because “I get paid by the hour.”
Contractors, on the other hand, quote a job upfront, so while an extra day hurts—because it’s one more day you can’t lease the unit—it hurts less than with employees.
The other problem with contractors is they often can’t start right away. We mostly use contractors and don’t tend to have this problem, as we have enough work to keep a good number busy. But that won’t be the case for most new investors.
In such cases, you need to be very proactive with scheduling to prevent having long waits. Scheduling software like Monday can be a big help in this regard.
Scopes of Work or Turnover Checklists?
The next question is whether to put together a scope of work or just have staff (and I would only do this with staff) go through the property and fix every item that needs fixing based on a checklist.
The checklist method is certainly faster, but you are relying on construction staff to make aesthetic decisions and decide when something needs to be replaced or if it can last a bit longer. No offense to those in construction, but they don’t tend to be particularly good at this. Many aren’t very detail-oriented either. In addition, there’s nothing to verify the materials they are buying are necessary for the job, and this opens the door to fraud at worst or overspending at best.
I much prefer putting together a scope of work, although this adds a step, and thereby time, to the turnover process. We fill out our scope of work template on-site. You can download my scope of work template here.
We then transfer it over to our project management software. We use Smartsheet, which we find quite helpful. But there are others available.
In the top section, we label it Prework, which includes things like getting utilities on, trash out, flea treatments, etc. Then we go room by room with all the items the main contractor (or employees) needs to do.
The next section is for the various vendors not working under the main contractor (like HVAC, flooring, paint possibly, etc.). Last is a punchout list (like putting up blinds and outlet covers after painting, installing appliances, and, of course, cleaning).
We also ask the contractor to add and bid on any items they think we missed and decide at the end whether to do those or not. An example scope looks like this:
The advantages of using Smartsheet (or something like it) is that:
- You can attach pictures next to each line item to show what you are talking about if it isn’t clear.
- You can also share that scope with contractors to get bids from them in a way that’s easily comparable if getting more than one quote. (Always use your own scope of work to get bids on, as it’s very difficult to compare separate contractors’ quotes if they’re on different templates.)
Overseeing the Work
If using employees, I would always give them a specific time goal based on how long they think it will take to complete. If they think it’s unreasonable, they should tell you upfront, not complain after missing it. But they should be aiming for something.
Dale Carnegie gives a famous example of how one manager turned a factory around just by writing on a chalkboard how much the day shift had been completed and then doing the same with the night shift. It’s good to get those competitive juices flowing!
Some investors include discounts in their contracts with contractors if they take too long. We don’t, but we most certainly do put contractors on a “time out” if they start slowing down, i.e., we stop giving them projects for a while. And trust me, with most contractors, their quality and speed tend to ebb and flow, so you will need to keep a close eye on this.
I would also recommend having a materials list that you go off of. If you provide nothing, contractors will tend to buy the cheapest, lowest-quality items to save costs, and employees will be inconsistent.
You want to standardize, standardize, standardize. Use the same paint colors (or maybe two or three varieties), the same carpet, appliances, doorknobs, light fixtures, ceiling fans, etc. By doing this, it makes it easy to do maintenance on the units and easier to buy materials for turnovers.
Furthermore, if you procure the materials yourself, you can garner large discounts from suppliers. With Home Depot, for example, it’s possible to save 15% or more on materials with their Preferred Pricing program if you buy a substantial amount. Other stores have similar discounts. We are now procuring materials for our contractors to take advantage of these types of discounts.
The National Real Estate Investors Association (REIA) has a 2% rebate with Home Depot, too, so it would be worth joining your local REIA to take advantage of that.
For any decent-sized project, it’s worth stopping by or having a manager stop by once or twice to make sure progress is being made. This is all the more important with employees. On small projects, that’s not necessary.
But you should stay in constant communication. Let them know you’re watching and waiting impatiently. With turnover, it’s the unwatched pot that never boils.
And, of course, never pay out everything to a contractor upfront. Make sure they are completely finished before cutting the final check.
Quality Checks
The other nice thing about having a scope of work is that it gives us something to work off of when we go to check our contractor’s or employee’s work.
For any items that don’t check out, we tell them to go back, fix them, and send us a picture to prove it. If that’s not done promptly, we’ll send another person (usually one of our maintenance techs) to finish it and discount the final check by the amount that the item was worth.
This part is critical to get right, as it’s very easy for either the last stages of a turnover to drag out or not to finish entirely. This can mean either having difficulty renting a unit that isn’t complete or an irate tenant when they move in, and things aren’t as they should be.
Pictures and Marketing
When everything is done, get pictures and list the property. Make sure to take them with a high-quality camera with plenty of light. It’s not necessarily a bad idea to have a professional photographer do it, although it’s a bit pricey. And the front picture of any house should be at a 30-to-45-degree angle (it makes the home look bigger).
From the get-go, you should take note of all the property’s characteristics (bedrooms, bathrooms, garage, basement, etc.) and amenities (built-in microwaves, water softeners, sump pumps, fenced yard, etc.) in your property management software so it’s easy to reproduce them in an ad.
You should do a comparative market analysis to find out what to start the rent at while the property is being turned over. That way, the day it’s done, you’re ready to put it on the market.
Final Thoughts
Finally, track your results. What gets measured gets managed. You should know not only how long it takes to get a turnover done on average but how long it takes to get a scope of work done and then how long it takes to get the work done after that.
We track those things for each contractor we use, along with their Quality Check Percentage (how many items we require them to go back and fix, compared to how many were done right). If the percentage drops too low, they go on time out.
These are valuable key performance indicators you should track and continuously work to improve upon.
Mastering turnover is about balancing speed, quality, and price. Setting up systems to ensure as little time is wasted as possible in between each step, as well as evaluating the performance of each contractor or employee doing the job, is essential to optimizing your turnover process. This way, you ensure that the most controllable operating expense real estate investors have doesn’t drag down your investments.
Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
from Investment – My Blog https://ift.tt/Lhim8PN
via IFTTT
0 Comments