The True Cost of Turn Over
Taxes, insurance, debt service. Operating a multifamily property is expensive. There is one expense that multifamily investors would rather live without. That is turn over cost. It can creep up to unsustainable levels or be minimized with effective management. What is turn over costs? How can multifamily investors avoid turnover costs and increase profits?
What is Turnover Cost
When a resident moves out of an apartment there is wear and tear that occurred during their occupancy. In order for this apartment to be re-rented or turned- over to a new resident, the wear and tear has to be cured and the apartment has to be brought up to a standard that would make it desirable to a new resident. The costs associated with doing this are turn over costs. This is also called a make-ready cost.
“Turnover is the cost incurred when turning over possession of a unit from a prior resident to a new resident”
What is included in Turn Over Cost?
The longer the resident lived in the apartment, or the greater number of occupants that lived there, lifestyle, pets etc. the greater wear and tear may be. The unit may also be outdated and in need of renovations or upgrades. Repairing the wear and tear and renovating the unit can cost thousands of dollars depending on the extent.
Turn overs also require finding new residents, which may include costs of advertising and also broker fees incurred for having a broker lease the unit to a new resident. There is also a vacancy expense.
Where the other turn over costs are expenses that have to be paid out of pocket, vacancy expense is a theoretical loss of income. It is based on how much money the apartment would be generating assuming the apartment was leased to a reliable resident who paid full market rent.
“ The longer the unit sits vacant, the greater this expense becomes.”
Whatever amount the unit would have generated is equal to your vacancy loss. The longer the unit sits vacant, the greater this expense becomes. This may seem like no big deal because you are not paying out of pocket, but even though your income decreases your expenses do not. By not generating this income, payment for the operating expenses of the property will have to sourced elsewhere, indirectly reducing your profit further.
Depending on how the unit is metered you may also have the additional cost of paying the utilities for that unit if you were not already. If there is an eviction involved then turnover costs will increase further.
These are the turnover costs associated with just one unit. If there are a number of units turning over at the same time it is easy to see how these costs can stack up. This is why real estate investors hate turnover.
What is the average turn over cost?
Turnover costs are market dependent. And even more so apartment class dependent. The quality of turn over renovations and concessions needed for an A class apartment may warrant thousands of dollars while a D class property may only be a few hundred.
Vacancy expense must also be factored in. How much does it cost to turn over a multifamily apartment? The rule of thumb of 1.5 months rent is a conservative estimate that can be applied across all property classes in low vacancy markets assuming the units are in decent condition. As market vacancy increases this may increase to 3 months. These numbers may fluctuate based on the size of your apartment community and staffing.
“How much does it cost to turn over a multifamily apartment? The rule of thumb of 1.5 months rent is a conservative estimate”
How do you prepare for turnover?
Preparing for turn over should begin long before it actually happens. Efficient asset management/ property management involves anticipating turn over. Turnover is most likely to happen when a lease expires and a resident decides not to renew. Reviewing your residents’ lease dates lets you know how many leases are set to expire and when. You should also be aware of your average apartment turnover rate or what percentage of tenants usually leave annually.
This should be tracked closely so you can send renewal notices to residents 60-90 days before lease expiration. Depending on the resident’s decision to renew you can prepare for turnover of his or her unit. If you are anticipating a high volume of turn over it may put you at a disadvantage for negotiating lease renewal terms.
Know if you are in a high or low vacancy market. If you are in a high vacancy market it may take longer to find a new resident. Some markets are seasonal. It may be easy to find a new resident one month and difficult in another.
In this case it may be worth it to offer a current resident more incentives to stay or to send renewal notices much earlier so you can begin searching for new residents sooner. This may include advertising the apartment for rent or beginning to show the apartment or a similar one that is already vacant.
What should you do when turnover begins?
Turn over starts when a resident decides not to renew. If a resident has decided not to renew, then determine when they will be moving out. Prior to move out, inspect the unit to see what repairs may be needed and schedule the appropriate contractors
These are the steps to turnover a multifamily apartment. Once the resident is out, return their security deposit less any deductions for excessive wear and tear or unpaid rent or fees. Secure the unit by changing the locks. Initiate renovations of the unit as soon as possible to avoid down time. If you have not already, begin marketing the unit to attract a new resident and sign a new lease. It is important to inspect vacant units regularly to avoid break ins or pick up on damage such as from leaks.
Turnover ends once a new resident has signed a lease and has completed move in procedure for the apartment. Some may go beyond this and include the time needed to orient the new resident to the expectations and protocols of your particular apartment community. Quickly fixing issues that may have been missed in the repair phase will also create positive first impression and encourage your new resident to stay longer.
"Turnover starts when a resident decides not to renew…Turnover ends once a new resident has [moved in]”
How do you minimize turn over cost?
When a lease is up for renewal, negotiate with tenants by either raising the rent less than planned, keeping it the same or even offering lower rent if financially justified. To determine this, compare the potential costs of turnover to the costs of the lower rent. If the turnover cost would create a $3000 loss for the year but the lower rent would be a $300 loss, lowering rent may be the financially conservative decision.
Because it may be harder to raise rent once it is lowered, giving a concession such as a partial or entire month rent free may achieve the same goal without decreasing long term rent roll. Other concessions that can be offered are upgrades to the units such as appliances, painting or property level amenities. These upgrades will encourage residents to stay as they are getting increased value for their money.
Increasing resident engagement/ bonding increases resident retention because it creates a sense of community that residents will want to stay and be a part of. Properties that are safe and well maintained also encourage residents to stay.
While residents do appreciate a well-maintained property, there is a line where too much construction can increase turnover. If renovations at a property are prolonged, create a lot of noise or debris it may make the apartment community undesirable to residents. Keep this in mind when deciding how aggressive or extensive to be with your renovations and when to time them.
Minimizing turnover time, reduces turn over costs. This includes minimizing time to renovate and repair a unit as well as time needed to find a new resident to lease the unit to.
When is Turn over good for multifamily property?
As expensive as it may be, there is a time and place for turnover. When a property is burdened by bad debt due to non-paying residents, or unsafe due to some criminal element turnover can fix these problems.
In this case the property manager will encourage turnover to get these residents out and upgrade to a higher quality resident profile. This makes the property safer for the new residents and the ones that remain while also ensuring the property generates enough income to perform needed maintenance and safety upgrades.
Sometimes properties have been neglected for a long time, have deferred maintenance or are just outdated. When this type of property is acquired by new owners, their business plan may include capital expenditures and major upgrades to units in the apartment community.
It is much easier to upgrade a vacant apartment than an occupied one and some repairs simply cannot be done while a unit is occupied. Encouraging turnover may speed up the renovation timeline. If there are enough vacant units, renovations can be started on the vacant units. Once a vacant unit is ready to be occupied, having a resident of an unrenovated unit move in, would minimize turnover expense.
Turnovers also present the opportunity for a larger rent increase than a lease renewal. If there is a large enough rent increase that can be achieved then turnovers may be financially attractive.
To Turn or not to Turn?
Now you have a better understanding of turn over costs, how to prepare for them and minimize them. These are key concepts for asset and property management as turnover can make a property profitable or unprofitable. A vacant property does not generate cash-flow. Take control of your turnover costs and maximize the profitability of your next multifamily investment.
Quick Tips on Managing Multifamily Apartment Turnover
Turnover is the process of releasing a unit when a resident moves out. Also known as make-ready.
Turnover costs include Repairs, Vacancy, Marketing, Utilities.
The average cost of turnover can be 1.5 -3 months’ worth of rent for the apartment being turned
Preparation for turnover starts by anticipating it and knowing when leases expire
When turnover begins, schedule all needed contractors and leasing agents to minimize time needed to complete turnover
Minimizing the time it takes to turnover an apartment will minimize turnover costs
Turn over can sometimes be beneficial and necessary if it provides opportunity to improve the apartment community
Interested in learning more about investing in multifamily apartments? Give us a call or check out some of the other free resources we have available at Investupmultifamily.com.
Comentários