By: Wojciech Kic
Many details impact the bottom line in the operation of a rental property. In equally good or bad rental markets, the cost of property insurance, utilities and repairs will impact the cash flow. In a slow rental market, where no mistake goes unpunished, a management error may cause a premature sale or a bankruptcy.
Of all expense factors in the operation of a rental property, no single expense exceeds in importance the cost of vacancy and rent losses. In as much as a lease agreement creates value through future rental commitment, yesterday’s vacancy represents a permanent loss.
Eliminating vacancy is a goal that all landlords have in common.The approach of landlords in eliminating vacancy will vary. Some landlords will spare no expense in advertising a property. Others will hire professional real estate agents.The difference in success is in the timing of the marketing effort.
When does one start to market the rental property for lease? The beginning of the marketing effort for many landlords is the receipt of a 30-day move-out notice from the current tenant. Most residential lease forms contain clauses that allow landlords to show the premises to prospective tenants throughout the lease.
Tenants are expected to cooperate in the rental process.The landlord’s expectation of a tenant’s cooperation includes the installation of a real estate agent lockbox with a key to the proper ty. The landlord’s wish list also includes keeping the dwelling clean, the yard cut and the display of a good attitude when faced by prospective tenants.
While lease agreements appear to secure the tenants’ cooperation with the landlord when moving from the property, is the landlord’s expectation of the tenant’s cooperation realistic? Worse, even when a landlord finds himself with a cooperating tenant, is the tenant’s cooperation in the landlord’s best interest?
Before answering the above question, it is important to estimate the demand for the specific property offered for lease. In the Houston area, where housing is abundant, the total demand for each specific rental property is very limited. For example, the Multiple Listing Service in Houston reflects a current availability of approximately 5,500 properties for lease.With an annual 2003 absorption of approximately 11,000 properties, the current inventory reflects about a six-month supply.
In a property-abundant real estate market, tenant behavior characteristics are different than in real estate markets, characterized by shortages of rental housing in general, and affordable rental housing in particular.
Let’s analyze a typical showing of a tenant occupied property. After setting an appointment with a prospective tenant, a landlord does need to coordinate the showing with the current tenant.The least of the reasons is to secure the current tenant’s cooperation and to announce an intrusion into tenant’s personal time. Maybe a tenant will be nice and clean things up? How about the smelly cat litter and always-overjoyed cocker spaniel? Of course, nobody knew that the potential tenant is possibly allergic to pet dander and cat hair.
Will the current tenant cooperate? First lets examine the showing schedule.You expected 4 p.m. but the current tenant knows your game. You are desperate and hopeful. How about 4:30 p.m. today? Better yet, no, 5 p.m . . . tomorrow. And what did you have to promise to the current tenant to gain their empty kitchen sink? An immediate deposit refund? Or was it a “Hail Mary” pass and you traded tenant’s deposit for last month’s rent? Please accept?
Now the showing. At 5:15 p.m. tomorrow. You may not care about politics but you will pay for a polarized electorate in your rental property. Current tenant is a Republican? Evidence to wit? Sign in the yard? You just lost half your prospects. Current tenants a Democrat? Ditto for the other half.
Now how about the furnishings. Are they nice enough? Too nice? If the tenants would only remove the ivory tusks from the wall, that might help. But wait, the furnishings are perfect. No way could you ever afford it. Neither will your new tenant. Better have excuses ready explaining why you leased to the current tenant in the first place.
Now come the promises.Will you paint the property? “Of course” (I will only touch- up). The prospective tenant is thinking, “Great!” (He will repaint it entirely). How about cleaning? Have you ever heard how many words an Eskimo has for different colors of snow? Which one word did you choose when you promised that a previously occupied property would be spotless when vacant?
The current tenant’s lifestyle will hint at the landlord’s personal bias of an expected lifestyle from the future tenants. It is a limitation that prospective tenants find unacceptable.
How many prospective tenants will a landlord drag through these hurdles? Typically, given a limited pent-up demand for each rental property, a landlord in Houston will likely run out of rental prospects before the property actually becomes vacant. Once you are out of rental prospects, time must pass before the demand for the property builds up again. It is our estimate that when showing an occupied property to prospective tenants it takes 40 days more to find a new tenant than when starting the marketing process with a vacant property.
But that’s not all. A tenant secured when shown an occupied property is rarely delivered a product that meets their expectations. Landlord’s unkept promises set up the stage for a confrontational relationship with the tenant, and it does not bode well for lease renewals.
In parts of the country where scarcity of housing is the norm, tenant decision-making considerations are difficult to discern.The use of leasing techniques from limited-housing opportunity markets does not meet the reality (read: profit) test in the Houston real estate market.
What is the alternative? Do not count the gains of showing a property when it is still occupied.The perceived advantage of a head start adds days to the marketing effort, and it negatively impacts the quality of the lease. Instead, use that lead-time to study the current market rents and to schedule the make-ready maintenance and repairs. Place the property on the market as soon as it is ready for immediate occupancy.The odds are that one of the first prospects will take it.You will have no promises to break, and you will be ensured a long-term tenant. How? You just delivered to the future tenant a complete leasing experience, including a respectful treatment when it is their turn to move out.
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