It's no secret that the rental business is an excellent source of passive income. But if you're a smart and savvy real estate investor, you know there's more to it than just leaving it alone and cashing the checks. Your ultimate goal is to reduce tenant turnover by getting tenants to renew their leases and stay for the long term so that you can increase profits.

Smart rental property owners make it a point to reduce tenant turnover.

If you have more than a 50% average tenant turnover rate, this should immediately raise a red flag. This article talks about the hidden costs of tenant turnover, why your tenants don't renew, and how to fix it. Learn how you can reduce tenant turnover today so that you can squeeze more profit from your rental property.

4 Tenant Turnover Costs

Vacancies disrupt your income stream, forcing you to spend on marketing and maintenance so you can find a new tenant. Losing a tenant isn't cheap. You may think you already know about all the costs of tenant turnover, but here are a few more that you probably didn't take into consideration:

1. Management

Did you hire property managers to take care of your real estate investment? If you did and you agreed to pay a flat rate, property management companies will most likely continue charging you the same fee despite your vacancy rate. Fewer tenants mean a higher cost per tenant, which impacts your bottom line.

2. Marketing

How much did you spend on marketing to attract the last tenant? While Craigslist and Zillow will undoubtedly help, if you're looking to fill the vacancy quickly, you may have to spend on paid ads to get the volume of viewings needed to close on the lease. Plus, let's not forget real estate agent commissions.

3. Repair

Do you have enough cash flow for the repair costs? The longer your rental units sit empty between leases, the more they deteriorate. This means you will have to do more work to maintain them. You'd be lucky if your previous tenants kept the property in tiptop condition, but more often than not, you will need to do repairs or hire a cleaning service, unless you can charge them for carpet cleaning and excessive damages. There might be some wear and tear on the carpet or flooring, along with some peeling paint that needs work.

4. Showing

Do you have the time to show the property? Another hidden cost is the time spent showing the property. Most prospective tenants want to do a thorough inspection of the property before signing a lease. The meticulous ones usually stay for hours checking every available unit, interviewing their neighbors, and doing their research until no stone is left unturned. This is why it’s so important to follow the apartment turnover checklist and ensure the unit is ready for new tenants.

reduce tenant turnover

Why Your Tenants Don't Renew

Now that you know the costs let's talk about why your tenants decided not to renew the lease. Did you know that 6/10 people say moving is the most stressful life event, with divorce being second? If a tenant decides not to renew their lease, take it seriously; there's often a good reason why they had to make that difficult decision. Bad neighbors, poor management, and other external factors are just some reasons why people move out. We'll break it down for you here:

Bad Neighbors

Feeling unsafe or uncomfortable around their neighbor is one of the most common reasons for tenant turnover. They could have a neighbor they believe to be a bad influence on their child, or perhaps they recently had their property broken into, and they think the culprit to be someone next door. It's essential to feel safe in your home and, by extension, your community. This is why many people prefer to have neighbors that have not been to prison.

These are common issues in multi-family rental buildings or compounds. That's why you must conduct a background check on each applicant and do the due diligence before sending the lease agreement. You can do this yourself, or you can hire tenant screening services. Here's a quick list of the things you need to do during the tenant screening process:

  1. Rental application
  2. Credit check
  3. Background check
  4. Previous landlord contact information
  5. Tenant's employer contact information

Apart from these tenant screening reports, make sure you sit down with the new tenant for an interview. Ask them why they want to move to your area and get an idea of their lifestyle. Learn every possible detail that you can during tenant screening, so you can determine if they are quality tenants.

Personal Reasons

Sometimes though, it's just personal. No matter how sophisticated your rental system is or well-mannered your tenants are, you might not be able to prevent tenant turnover if any of the factors come into play:

1. High Cost of Living

If your renter goes through a setback, such as an illness or a costly vehicle repair, this can make them vulnerable to even the slightest rise in their bills. If they've been living from paycheck to paycheck for a while, this small "financial emergency" may push them to move out immediately. We saw this happen a lot in 2020 due to COVID-19.

2. Employment Issues

A sudden change in employment status can take away your tenant's ability to pay their rent and force them to find a cheaper rental. If their company assigns them to a different office in another state, this may also leave them with no choice but to relocate - assuming they don't have any other reason to stay.

3. Better Opportunities

Sometimes, it's a change in the situation. Maybe they decide that it's time to be a homeowner, or they could want to upgrade their living situation and move to a better part of town. They may also decide to move in with their partner, get married, or have a baby, which means they have to find a larger space. All of these reasons have nothing to do with you. If you have other units to offer them, make them aware of it!

Poor Management

If we're talking about reasons you can control as a landlord, property management is the first. Like any business, a rental requires you to take care of your customers and make sure the property is profitable. This means you (or your property manager) need to keep track of lease expirations and renewals, schedule maintenance and repairs, collect payments, do the accounting, and advertise vacancies, among many others. Failure to do any of these could result in complaints, accidents, and ultimately turnover. Here are two indicators of a poorly-managed rental property:

1. Slow Response to Complaints

While you can't address all tenant requests right away, it's essential to make them feel that you are not ignoring their requests or taking their grievances lightly. Make sure that you hear them out and face them when they ask for you. If this goes on long enough, it could damage the landlord-tenant relationship. Worse, they might resent you and leave as soon as the lease expires.

2. Lack of a Formal System

Good renters usually want everything to be clear and spelled out in writing before they move in. They want to know the rules and regulations they must follow (see the lease agreement clauses you should include), the people they should talk to about maintenance requests, and where they can access information about their tenancy status. Having a formal system in place gives them a feeling of security since they don't have to worry about possible payment oversights, insurance problems, or even sudden termination notices.

Reduce Tenant Turnover with a PMS

It's clear that excellent property management helps eliminate factors leading to tenant turnover, keep all units occupied, and ultimately protect your profit.

Still, managing a rental property is easier said than done. Even the most experienced landlords can make costly mistakes when managing several units, especially if there's no formal system in place.

Your best option is to use a rental property management software (PMS). This tool helps property managers and landlords run their businesses efficiently. It consolidates information into a single system, making it easy for you to track, analyze, and automate. Here are some of the things this type of software can do for you:

1. Tracking

Save tenant details and track their activity on a single platform, which you can access anywhere in the world through your smartphone or desktop. This way, you can pull up their information immediately.

2. Automation

There is no need to go through tons of documents to find out who needs reminders for late payments, auto insurance expiration, or lease renewals. You can program the software to automatically perform all repetitive tasks, increasing your productivity and reducing human error.

3. Transparency

Generate monthly and quarterly financial reports. The software provides a portal to share data, such as the balance sheet, rent roll, and maintenance activity. Improved transparency, satisfaction, and trust can lead to more referrals and reduce tenant turnover.

4. Communication

It's easy to lose track of your tenants' complaints and requests if you record them manually. The right software can help you document these issues and get notifications and updates on their resolutions.

In a Nutshell

Because most rental properties only become profitable after two years, getting a lease terminated early means losing several months' worth of profit in one fell swoop. Follow the steps above and you’re well on your way to reducing turnover and increasing profits.

Frequently Asked Quesitons

David is the co-founder & CMO of DoorLoop, a best-selling author, legal CLE speaker, and real estate investor. When he's not hanging with his three children, he's writing articles here!

Legal Disclaimer

The information on this website is from public sources, for informational purposes only and not intended for legal or accounting advice. DoorLoop does not guarantee its accuracy and is not liable for any damages or inaccuracies.