Tenant Turnover
Tenant turnover is an inevitable part of property management. However, tenant turnover can consume a large portion of operating expenses which can be problematic for landlords in planning, budgeting, and managing the bottom line. Frequent tenant turnover can disrupt other tenants in the rental community which could cause problems in the landlord-tenant relationships.
When a tenant vacates the property with clear intention to terminate the lease, or is removed from the property by court order, the landlord must take steps to prepare the property for a new tenant. Tenant turnover can happen with or without proper notice to the landlord. A landlord needs a plan of action to ease the transition of tenants, in and out, to help minimize tenant turnover costs during this period.
For planning and budgeting purposes, it is helpful for a landlord to determine his turnover rate. Turnover rate is the percentage of renters that move out of a property at the end of each contract period. To calculate the turnover rate, a landlord would divide the number of tenants that move out in a 12-month period over the total number of tenants that moved in during a 12-month period and then multiply by 100.This rate represents how many tenants may be expected to move out each year based on the number of tenants currently in residence. The tenant turnover rate is helpful to understand how tenant turnover affects the business, and what steps could be taken to reduce turnover costs and improve property management.
Turnover costs include more than just lost rents from a vacancy. Lost rent from an extended vacancy can be a serious setback for some landlords. There are associated expenses that must be paid regardless of the vacancy. Costs can vary depending on financial obligations, operating costs, property location, property condition, age of the property, and local market supply and demand.
When developing a plan to address tenant turnover, a landlord should include an analysis of his average tenant turnover rate, calculate how much a turnover costs his business, and budget accordingly for turnover costs.
Tenant turnover happens for various reasons. While some instances of turnover are predictable, others are not. Tenant turnover occurs after:
- Expiration of lease agreement: Typically tenants have an option for lease renewal at the end of contracted term. If tenants decline to renew the lease, the landlord must proceed with his tenant move-out process. A tenant vacating the property begins the tenant turnover process.
- Early Termination of the lease: The tenant may break his lease by leaving the property early. At the tenant’s departure, the landlord will begin the process to turn over the property.
- Eviction: Eviction is a court ordered process to remove the tenant from the property as a result of a material violation of lease terms. The landlord regains possession of the property and begins the process of tenant turnover.
Tenants may choose to relocate for any number of reasons, such as:
- Dissatisfaction with the unit, the property, property management, or neighboring tenants
- Financial changes
- Privacy and security concerns
- Space requirements
- Life events, e.g.; job relocation, family matters, marriage, divorce, death
Tenant turnover costs can vary whether the properties are self-managed by the landlord or by a property management company. The turnover process creates administrative work with associated costs of time and labor by the landlord and his staff. The process can include hidden costs for finding a new tenant such as marketing and advertising, responding to inquiries, showing of property, application processing, tenant screenings, tenant selection, lease signing and new tenant onboarding as well as costs associated with the outgoing tenant for inspections, cleaning, repairs, deposit accounting, and possible legal fees and court costs for evictions.
Frequent tenant turnover can negatively affect the landlord’s brand and reputation. Potential renters check online reviews and rank properties by desirability, location, rent, amenities, and rental policies. If it appears that the property has constant turnover, the potential renter may focus his rental search on other properties.
Frequent tenant turnover may also create a potential concern for future buyers of the investment property. A potential buyer may wonder what is wrong with the property if there is frequent tenant turnover and factor that frequent turnover into negotiating a lower sales price.
There are practices that can help in reducing tenant turnovers. Tenant screening is a primary factor in qualifying and selection of quality tenants who are looking for a long term rental relationship. These tenants can help keep the property in good condition, meet their rent obligations, and generally are looking for like-minded neighboring tenants. Providing a longer term lease agreement or offering satisfactory renewal terms at conventional lease termination will help reduce the landlord’s operating costs.
The lease agreement provides the contractual terms and conditions for landlord and tenant. The lease should be clear in detailing rental policies and practices for tenancy. This includes rental fees, security deposit handling and return, landlord rules and regulations, rents, definition of material defaults, property damage, legal remedies for lease default including filing of eviction and tenant responsibilities for keeping rental property in good condition. The landlord’s move-out procedures should be clearly communicated to the tenant during orientation to ensure that the tenant fully understands his responsibilities at lease termination.
A positive landlord-tenant relationship helps to build tenant trust and confidence in the landlord’s property management. This can be an influencing factor in the tenant’s decision to renew or to relocate at lease termination .Maintaining open communication with tenants throughout the tenancy should be a priority business practice. Landlord attention to customer service matters, prompt response to repair and maintenance requests are also factors in renewal decisions.
Being responsive to receive feedback from tenants is important to improving customer services and overall property management. Tenants appreciate a landlord willing to listen and respond in a prompt manner to their concerns, likes, and dislikes. Conducting an exit survey at lease termination can provide valuable feedback to the landlord on a variety of rental policies and practices.
Tenant retention will reduce turnover operating costs. Many renters would prefer to renew their lease to stay in place and avoid the costs and stress of moving. By development of tenant turnover policies and practices, a landlord can understand his true costs of turnover and find ways to manage his processes in a more effective manner. A best business practice is to invest time and energy into positive landlord-tenant relationships to retain quality tenants to minimize frequent tenant turnover and reduce operating costs.