Calculating the Cost of a Vacant Property

Just like there are maintenance and rehab costs to think about, there are costs associated with vacant properties – and it’s directly associated with the occupancy rate. 

• If one property doesn’t collect rent one month out of the year, it amounts to a 91.66% occupancy rate. 

However, your occupancy rate in a year on a single property could be less or could be more. You don’t want to be short-sighted, and you don’t want to get trapped in magical thinking. When you’re creating a budget to cover any shortages in occupancy or any months of missed rent, you need to try to set realistic standards. 

There’s a difference between properties that are occupied and properties where you’re collecting rent. I can’t tell you how many of our property management clients come to us with their portfolios and tell us that their properties are 90% occupied, 98% occupied, or even completely occupied – but the numbers look different when we start collecting rent payments. 

• If you aren’t collecting rent payments from your tenants in full, they might as well not be there. 

Having a tenant staying at a property without paying is going to cost you money, whether you realize it or not. That’s part of why it’s so crucial to look at occupancy vs. rent collected because there is a difference, and it can be an expensive one.

Real-Life Example: My Personal Portfolio

To help illustrate this, I’ll give you an example from my personal portfolio. I have properties in Springfield, Ohio – which is a lower-income area – so they don’t cost as much. 

A property in Springfield that’s worth $50,000 would be worth more in the ballpark of $150,000 somewhere like Columbus, Ohio.

Because properties are worth less and the area is lower-income, rents have to be lower as well to keep up with the neighborhood standards. When you’re working within a market like that, you need a solid plan to make sure you’ve still got a steady stream of incoming revenue from the rent you’re collecting on a monthly basis. 

Personally, I plan to be vacant for a minimum of two months every year. Even if you get lucky and your tenant decides to stay for the full year’s lease – or maybe even a few months after that – you have to plan for reality. Your property is likely going to be vacant for at least part of the year, and you may have to do rehab or maintenance during that time. 

Depending on what needs to be done, that could take two months or even longer. Which, you guessed it, means the property is going to stay vacant for a longer period as well. 

When tenants move out, whether they’ve been renting your property short or long-term, there’s likely going to be maintenance that needs to be done, even on a minimal level. Sometimes, with long-term tenants, there’s even more work that needs to be done, which results in a lengthier turnover between tenants. If repairs are quick and easy, you can hopefully get a new tenant moved in without much vacant time. 

However, you have to be realistic about how this works because it’s not cut and dry. You always have to bank for reserves and set that money aside to cover times when your property or properties are vacant.

A Note About Long-Term Renters

Long-term renters can be a blessing. 

In fact, you might be thinking about long-term renters as an ideal situation, especially if they always pay the rent on time and in full, because then your property is less likely to be vacant in the foreseeable future. 

• Investing in real estate is still an investment, and I firmly believe that you have to go into all investments with your eyes wide open. 

We all want to hope for the best and plan for the worst. And, if you’re not doing that, you should start. If you’re not setting money aside for reserves, vacancies, your maintenance and repair budgets, and other issues that can arise with rental properties, you could inadvertently set yourself up for a harsh surprise down the road. 

One of the biggest pros about long-term renters is the inherent stability that comes with having someone occupy your property over a long-term time. 

For example, let’s say you have a tenant who has been renting your property for 30 years. This could be a tremendously positive situation. Hypothetically, this person may take great care of the property. They pay the rent on time and in full every month, faithfully, they do little things to keep it in good repair on their own, and you’ve got a solid relationship with them. 

Does this sound like a great situation for you? To many people, it is. 

However, I would still caution you to manage that situation as well. If the market changes and you need to raise rent, it might be more difficult to have that conversation with someone who you’ve had as a tenant for years – and even decades. You don’t want to get yourself into a situation where you are costing yourself more money because you have a personal relationship with someone. Unless, of course, it’s a situation where you feel there’s reason to charge less rent. 

Once in a blue moon, we find tenants who love the property and want to stay there forever. 

We always hope our tenants will take care of properties like they were their own, but there are certain cases where people go the extra mile. You can’t expect your tenants to do major repairs like putting a new roof on or replacing a furnace, but if someone wants to put a little bit of money in to paint or make small changes – and it’s a mutual agreement – this can be a beautiful arrangement. 

A tenant who actively does proactive maintenance like changing the furnace filter or maybe does small plumbing tasks and other little things around the house might be worth appreciating with a lower-than-market rent rate. That’s up to you and what makes sense for your business. 

Now, there can be a flip side to this scenario in that you may have to spend more money on repairs down the road when they move out or, in some cases, pass away or have to go into a different living situation due to older age. 

Maybe your tenant absolutely loved the 1970s decor that was popular when they started renting the property in 1975. They kept everything in good repair, and it looks nice – but it’s not necessarily going to be appealing to modern tenants. 

If you’ve found one of those incredible tenants, I would still recommend doing periodic check-ups to assess the situation and see the overall condition of the property. 

• Consider doing an annual – or even a bi-annual – walk-through that you schedule with your tenant to get a gauge of what’s going on inside. 

That way, if you see any major issues that may need to be fixed – or they let you know about issues they’ve been having – you can correct them before they become more expensive. You also want to do these walk-throughs to ensure that nothing has changed in your tenant’s life or living situation. 

If all of a sudden they’ve stopped taking care of the property at the same level they’ve done for years, then you want to be aware of it and be able to anticipate future costs. Or, in some cases, alert yourself to potential problems that could arise down the road. 

When you give yourself a chance to see the property for yourself, especially in long-term rental situations, you might notice that a ceiling fan isn’t working correctly, or other small repairs could be made, and then you can take care of it. This kind of check-in can help start a conversation with your long-term tenants. 

For example, you’ll fix that ceiling fan for them and take care of any other concerns they have, but you’re also there to let them know that you’re raising their rent by $20 in the next 60 days. 

Not only will this help you keep long-term relationships in good standing, but it’ll also make these situations more profitable and help eliminate any long-term surprises when they move out.

Final Thoughts

While some situations are out of your control, it’s important to focus on what you can control. There isn’t anything wrong with hoping to have an occupied property year-round – and many of us aspire to find those fantastic long-term tenants. However, it’s important to calculate the costs of vacancies on every property you own and account for the money you won’t be getting from rent when you’re rehabbing, maintaining, or in the process of searching for a new tenant to occupy that space. 

Budget for the time that you won’t be making income on that property, try to get someone in place as soon as possible but don’t rush the process. If you manage to find someone who will be a great fit for the property and maintain it to the standards you hope for, then you may end up in one of those once-in-a-blue-moon situations where you’ve found a fantastic, long-term renter who will pay you rent every month on time. 

It’s better to prepare for vacancies than cut corners and end up with a revolving door of tenants that will, over time, add up to more time the property spends vacant vs. the time it’s rented and making you money.