How to minimize vacancy loss in real estate

Real Estate is a low margin business. When buying a property, landlords are not trying to hit a homerun and double their money in a year, two years, or even five years. What makes Real Estate investment exciting is its consistency and safety. Here are some facts that attract investors to Real Estate as an asset class

• The demand for housing and shelter will always exist as a basic human need.
• Over the long run, Real Estate has always generated solid positive returns as an investment.
• Real Estate Investment has better tax implications than other forms of investment.

Value and Wealth through real estate is created in the following ways

Purchase
Purchase an asset at a below market price and value has instantly been created for the buyer.

Value-Add
Reconfigure, develop, or use the asset in a way that generates higher revenue than the previous owner and value has been created.

Appreciation
Purchase in an area where demand for real estate will increase and/or rents will increase, and value will be created over time.

Cash Flow
Generate yearly revenue that exceeds yearly costs and value is created through positive cash flow.

With the proliferation of information on the internet, it has become more and more competitive, and therefore difficult to generate outsize real estate returns through Purchase, Value-Add, or Appreciation related strategies. While it is certainly possible to find a great deal through hyperlocal knowledge, it is quite likely that the buyer will be competing with multiple other knowledgeable buyers. Almost all real estate investors understand value add strategies like those that involve renovation; these usually get built into the offer price. Finally, betting on appreciation is an educated guess at best.

One often overlooked but extremely important component of real estate returns is Annual Cash Flow. We feel that optimizing operations to maximize cash flow is an area where significant improvement can still be made. And one major component that negatively impacts cash flow is Vacancy Loss. In fact, we argue that minimizing vacancy loss is the most important operational optimization a landlord makes in their portfolio. Consider this basic example

• Assume a purchase of a 10-unit rental property for $1,800,000.
• The cash investment (down payment and closing costs) is $400,000
• The property earns projected free cash flow (rent roll minus expenses/mortgage) of $40,000 per year

In this proforma scenario, the cash on cash return is 10% every year. This is a solid investment. Now Assume

• Each Apartment is rented for $1,600 per month
• 4 Tenants move out every year (40% turnover rate, national estimates have this around 45-50%, but may be higher or lower depending on location)

In this simple example, if it takes 1 week to rent each apartment, the yield is still at a healthy 9.6%. What if it takes 1 month - the yield is now 8.4%. What if it takes 2 months - the yield is now 6.8%. Vacancy has a massive impact on cash flow, and there is probably no other operational optimization that can be made which has as significant an impact.



How to minimize Vacancy Loss
Three key tactics can mitigate vacancy loss. They are the following:

• Price the vacant unit at fair market rent
• Market the property on as many online and offline sources to maximize exposure and demand
• Qualify and convert the maximum number of inquiries and demand into physical showings.

By maximizing demand, landlords can minimize vacancy. These tactics might sound simple in theory, but they prove to be difficult to execute. Why did it take the property manager 2 days to get back to a prospective tenant? Why didn't the leasing agent try to make contact multiple times even if the prospective tenant was unresponsive? Why did the solo landlord not take advantage of all online marketing platforms?

Perhaps it was because the property manager was dealing with 5 maintenance requests the same day and did not have time to reach out to prospective tenants sooner. Perhaps the leasing agent has 10 vacancies to try to rent and spends a major portion of her day driving around and responding to the hundred new inquiries. Perhaps the solo landlord has a 9-5 job and does not want to spend all his free time posting his vacancy on the 40 online websites.

These stakeholders, who become overwhelmed trying to minimize their vacancy will often justify a suboptimal leasing process.

• "Craigslist has always worked for me so that is all I use"
• "If the tenant were serious, they would respond after one attempt. I should not have to follow up"
• "I send prospective tenants a qualification survey and I wait for them to answer before I will spend any time talking to them"

And so, landlord returns get eroded due to higher than necessary vacancy loss. Leasing Agents, Property Managers, and Landlords are busy, and they cannot create additional hours in a day. There is no behavioral adjustment that can change these facts. Rather than wishing for these stakeholders to change their behavior, they should be provided with technological tools that will automate many of the steps required to rent homes. These tools should make it possible to quickly and automatically advertise on every online platform, quickly and easily interact with prospective renters, and quickly and seamlessly convert those prospective renters into actual tenants.

HomeRhino is a unified leasing platform that simplifies and automates the leasing process:
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