September 20, 2009

Unexpected Rental Vacancy and Resulting Costs

Recently one of our renters vacated our property without telling us. Thankfully they didn't leave owing substantial amount of rent and we didn't have to go through the hassle of evicting a non-paying tenant.

On the negative side however we now need to put some work into cleaning up the place and getting it ready to rent out again. The house needs cleaning, a new fridge and new carpet. I'm thinking that all together that this will cost us something around $2,000 to $3,000.

When you are renting a property you should try to plan for the unexpected. How can you plan for the unexpected? You can't cover every possibility but you should at least put in some expectation that you'll have some vacancies and some occasional repair and maintenance costs.

Vacancy and maintenance costs should be taken as routine occurrence with a rental and built into your budgets. But its also best to minimize the impact of these occurrences. You need to plan for it in advance and work quickly to rerent the unit.

Plan for some vacancies - Rentals usually have a vacancy rate in the 5-10% range. So at any given time 5 to 10% of the units are unrented. This is commonly due to turnover and some lack of demand. Personally I figure that on average 1 month out of the year you might have a vacancy. Usually I'd hope to keep renters for longer but on average you'll probably get people staying 6-24 months with the average tenant lasting a year. Whenever theres a vacancy you'll likely lose some rent when while you're showing the place to the new tenant.

Have a budget for repairs and maintenance - Repair and maintenance costs come in two main categories. You'll get random things failing like a broken appliance or a plumbing malfunction. These repairs are in the $100 to $1000 ballpark depending on the exact nature of the failure. You also have maintenance costs for major items. Eventually you'll need to replace the roof, get new appliances, replace the carpet, maybe get new windows, etc. For any property you own you should account for these costs and plan for them.

Try to minimize vacancy time - Right now our focus is on getting the rental fixed up and ready to rent as soon as possible. Every day that goes by with the unit unrented and being worked on is 1/30th of a months in lost rent. Its important to get a vacancy turned over and filled as fast as possible. We learned this lesson a few months ago with a property that we spent far too long working on. Personally I think this is one instance where Do-It-Yourself work can backfire financially. If I did all the work myself it would take substantially longer and I would end up losing more rental income than it would cost me to hire a professional to do the work quickly.

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