As rental property owner’s we are always looking for ways to increase our profits. One way a return on investment can be increased is by expenses being decreased.
I want to discuss how to go about keeping a particular expense in check while not undercutting the service you provide.
Tenant Retention – The Ultimate ROI Booster!
When running the numbers on a rental property we always factor in allocations for vacancies. This number can fluctuate depending on whether it is a single family home, multi-family and if it is in an A, B or C market.
However, in the end 5-8% is the range you will be working with.
What if we could keep that 5-8% though? Would that not boost our ROI a nice chunk in a given year?
Fact is tenant turnover costs money. Whether it’s a month vacancy or the cost to replace carpets and paint the place for a fresh new tenant. It is just much easier and cost effective if a tenant renews and stays.
Keeping Rents Up and Keeping Your Tenant
Bottom line is there is value in keeping a good tenant that pays on time and doesn’t cause damage to your property.
At the same time our costs of ownership do go up each year and we need to account for that so that the property’s ROI does continually drop.
I’d much rather raise rent 2% and keep a good tenant than get 5% more by bringing in a new tenant. Think about it, you are taking a loss on the first year guaranteed. The 3% additional increase in rent in the first year will not cover your turnover expense and that is assuming you have someone in right away. If the property is vacant for a month it will take you roughly three years to break even.
Plus you now have a new tenant who is an unknown commodity compared to your good existing tenant.
So in the end it begs the question – How Much Do You Raise Rent?
Generally the 2-3% range is the sweet spot where you don’t run off a tenant as it really isn’t worth the hassle of moving to save $20-$30 a month on rent that was say, $1,000.
However, when you begin to push passed 5% then you have much higher risk of losing a tenant. In our $1,000 example, now you are talking an increase of $50 or more per month. That’s enough to get someone thinking they may be better of finding something cheaper.
In the end my goal is to be fair and estimate the best number to keep my ROI consistent while making the property as affordable as possible.
It is a win-win and if the tenant stays then I have just boosted my at least 5-8% ROI for that year!
And just as an aside, yes – I have skipped raising rent in years where my costs did not noticeably increase If I have a good tenant and my costs did not go up then why should theirs. I already have the ROI I desire from the start cause I did what I preach – Buy Right!
If you need a full blue print on how to buy right and run the numbers on a rental property then be sure to read: