Real Estate 101: Getting It Rented

The following is a guest post by FMF reader Apex. He has been investing in rental real estate for more than four years and is authoring a Real Estate 101 series, posting every Friday, based on his experiences.  (To read the series from the beginning, start here.)   The series is designed to give prospective investors the basic tools they need to succeed.

After you make a purchase there can be a temptation to ease into the property.  You might want to take some time to get more familiar with it.  It can be easy to get distracted by little details and tasks, but this is the time you need a single-minded focus on one major task.  That task is to get the place rented.  This advice is equally applicable to re-renting a property after an existing tenant moves out.  When you have a vacant unit your primary focus must always be getting it rented.

Getting It Ready

If you are purchasing a property that needs rehab, you should start making arrangements as soon as your offer is accepted.  Ideally you would like to get any needed work started the day you close on the property.  Once the rehab is nearly finished you want to start advertising the property so you can have showings lined up as soon as it is finished.  Do not try to show a property before a rehab project is finished.  This is likely to be a waste of time as very few prospective tenants will be able to see past the current state of the property.

If the property just needs freshening up with some paint and carpet you should start taking steps to make those things happen in advance.  If you have a tenant moving out you can get the carpet measured and ordered so it is ready to install right after they move out.  If you are purchasing a property, get permission to get it measured in advanced so you can schedule the carpet for shortly after you close.  Do not however spend any money prior to closing on a property as closings do fall through.

Aggressively Market It

If a new property is in good enough shape to show, get permission to show it prior to close.  I have done this multiple times although not all sellers will allow it.  I had one property that I closed in the morning and moved a tenant in that afternoon.  I had to tell the tenant that the close was still pending and it could fall apart or get pushed back.  They wanted the place enough to take it on that contingency.  That kind of quick turn around is usually not possible, but it does show that you can and should be working on the next steps while you are waiting to close.  If you have a tenant moving out you should start advertising the unit at least 30 days prior to their move out date.  I like to start 45 days in advance to get the people who are looking more than one month ahead.

Time is Money

This is important because time is money, literally in this case.  It is easy to tell yourself that you just have a few minor expenses.  Property taxes and the mortgage payment are probably the big ones.  If you own the property with no mortgage your expenses could be very small.  You may feel like you can take your time to find a tenant because your expenses are low.  That is the wrong mindset.  If you justify that way of thinking you will start using it more often once you convince yourself it is an acceptable way to think. 

Every day that a property sits empty is costing you money.  That money expires each time the sun goes down and it can never be recouped.  The money you lose is not just the expense you incurred while the property was sitting idle.  That makes it easier to justify, but it is not accurate.  The money you lose is the money you could have gotten in rent.  If a property costs you $600 per month in expenses but rents for $1200 per month, you do not lose $600 each month it sits idle, you lose $1200.  This is easy to see when you realize that your bank account balance will be one $1200 check lower than if you had it rented.  Most people would not casually overpay $1200 for a large expense like a furnace just because they didn’t feel like looking for the best price.  Yet a number of owners are complacent about getting a property rented.  It does not make any difference if you spent $1200 you didn’t need to spend or failed to collect $1200 you should have collected.  You are out the same $1200 either way.  We seem to recognize wasteful spending, but it is easier to overlook the same waste when it is caused by a failure to get a property rented.

That is not to say that you should never have a vacancy.  Vacancies do happen and they are a normal part of the business.  The important distinction is that your goal must be to keep vacancies as limited as possible.  An empty property should create a sense of urgency, especially in the beginning when you have fewer properties.  Some investors take this part of the business far too casually.  They do not feel the urgency about it that they should.

I encountered a shocking example of this at a foreclosed duplex I considered buying.  One side was empty and a long-term tenant occupied the other side.  While talking with the existing tenant I discovered that they had lived there for 7 years.  The same owner had owned the property the entire time.  When I asked them about the other half of the unit they said there had been 2 different tenants in there but only for about 2 of the 7 years.  For over 5 of those 7 years that half of the duplex sat idle.  This owner clearly did not feel a sense of urgency about getting his units rented.  It is likely he had a full time job and just didn’t give this business the attention it needed.  He had a reliable tenant whose rent probably covered most of his costs so he may have felt it wasn’t urgent that he rent the second half immediately.  Based on the rent for the occupied half of the duplex he likely failed to collect as much as $70,000 in rent.

This is an extreme example, but it is not an isolated one.  I know of multiple instances of rental properties sitting idle for many months for one reason or another.  This is a not a productive way to run your rental business.  You cannot succeed if you are not generating revenue. 

Will it Rent?

There can also be some anxiety over whether or not you can get a property rented.  Let me assure you that every property will rent.  It’s simply a matter of price.  Market prices are just as important when renting as when purchasing.  It is important that you set your rent at the proper market rate for the type of property you are trying to rent.  If a property is not renting then there is a good chance you have set your rent too high.  This is yet another reason why cash flow margin is so important.  If you have little to no cash flow you will feel pressure to hold to a rent price that keeps your cash flow positive.  However, tenants will not pay more for your property simply because you need more rent to cover your expenses.

You have to be brutally honest with yourself regarding how your property compares to competing units.  If your property has disadvantages to comparable units you will almost surely not be able to get the same rent as those properties command.  Lowering the rent by $25 or $50 per month is far more cost effective than missing out on 1,2 or 3 months of rent holding to a price that is simply higher than the market is willing to pay.  If you cannot find a tenant after looking for 30 days then your rent is likely too high and you should lower it.  I was surprised to hear a story from my agent where he had a property that would not rent at $800 but at $790 he was getting calls.  My properties do not have that kind of hypersensitivity to price but his apparently did.  It’s important that you know your market and know what price people will pay.  Even if you aren’t sure, you can easily find comparable rental rates.  You can then find the market rent for your property by lowering it a little bit every 15-30 days until it rents.  You will find the price that it will rent at.

I now know my market well enough that I don’t typically have to adjust my asking price much.  I set my rent near the top of what I assess the market rent to be for my properties.  If someone tries to negotiate on price and my property has been listed for more than a week, I may tell them I can go down $25 but I can’t go any lower than that.  For the properties I am renting that has worked well.  It might take a little time to get a handle on the right rental rate for your properties.  The more you do this the better you will get at determining what price and process will work best for you and your properties.  The good news is you will get it rented, and if it’s a decent property you will get a good price.  Just be willing to adjust a little bit until you find the true market rent and you will be receiving your first rent check in no time.

Update: For the next post in this series, see Finding Good Tenants.

Comments

[daz]

This is such a timely article for me! I recently relocated to Va from cleveland, Ohio. We owned clear a big nice old house built in 1920. We set out to sell the property - in great condition- and the market is still very slow in Ohio. The realtor wanted to list it for 40k less than what we paid for it 12 yrs ago. We bought it before the bubble at a fair price. The realtor was saying the same things you said in your article about losing money on a vacant house and it seemed greek to me. Well we have decided to go ahead and rent it as we wait out the housing slump and we're kinda excited. My brother lives up in cleveland to kinda manage it and we have tenants lined up. Richard Bach said that renting your house was the way to go for boomers- we shall see. BTW we went through Dave Ramsey's FPU and thats why we are mortgage free. Loved the article- keep em coming.

[Jonathan]

Thanks for the kick in the pants! We now have all of our properties rented, but the most recent one did sit empty for 5 months after purchase! I never felt a huge amount of pressure due to the low carrying costs, though I did recognize that we were losing $X00 each month it wasn't rented...We let the [halfway inept] leasing service we use to show the houses talk us out of lowering the asking price for quite a while, as they kept saying it was the right price and that NONE of their units were signing leases and they didn't know why. Duh. Anyway, we'll do better next time!

[Apex]

@Jonathan,

The price is right on a commodity product but NONE of them are leasing. This made me laugh. I hope you are not using them anymore, or if so, not relying on their advice on price.

[Jonathan]

Apex, the latter...As we live 80 miles away from the neighborhoods we buy, it is not at all practical to do showings. But we will be far more proactive on making sure our properties are set up to succeed (i.e., pricing, advertising, etc.) in the future.

[Jim]

Another good article with good solid advice.

The problem I've had with my rentals during vacancies is being too slow to clean up and fix things. Time is money is very true here. I have a tendency to want to save money and do all teh work myself, but there isn't enough free time after my day job to get it done fast. Sure I can save a few hundred dollars painting and cleaning a unit myself but it might take me weeks to get it all done due to limited free time and I then lose that savings to lost rents. Its a hard lesson for a naturally frugal person to learn that paying someone else to do work can save you money.

Setting the rent at the right amount is also a very important aspect. I try to set rents on the lower side so its attractive to renters and will retain good renters. But you don't want to set it TOO low or you just throw away money and end up attracting only the less qualified renters. People will actually overlook a very cheap rental since they assume its a slum due to the price. Doing a fair amount of research on Craigslist or Rentometer.com or similar resources is improtant to get a good idea on rents and set the rent appropriately. You want to make sure you do a true apples to apples comparison too.

[Kathy]

Please tell us HOW you get it rented. Do you pay a realtor to list it? Do you advertise in the papers and then screen your tenants yourself? I am in MA. I am interested in renting out a condo for the winter season in Naples, FL after my mother is no longer able to winter there. I have the word out to many people but am wondering what the best process is. I love these articles because I am also selling my mother's condo in NH. Thank you

[Apex]

@Kathy,

You will want to tune in next week as the column will discuss how to find good tenants and I will be taking a more in depth look at the process of how to get it rented.

I list it myself, exclusively on Craiglist, show it myself, take applications myself and run them through a screening service and then make a decision.

I cannot give you much advice on how to get it rented when you are 1000 miles away other than to say you need to have a service of some kind involved obviously.

[Jim]

Kathy, For a seasonal rental in another state I'd hire a property management company that deals with vacation/seasonal rentals. They'll know how to find people who only want to rent for a season and how to deal with shorter term rentals. Its a bit different market with some different issues than typical rentals.

[Mrs. Pop @ Planting Our Pennies]

Kathy,
There is no shortage of property management companies in the Naples area that would be more than willing to have your mother's condo on their rolls. If I were in your shoes, I'd check Angie's list for recommendations and give some a call. Also, I don't know what your plans are for the summer months, but depending on where in Naples the property is (ie further from the beach?), you may be better off with a long term lease than trying to do piecemeal winter leases. The lower rent is offset by it coming in for more months and lower management fees...
Best, Mrs. PoP

[Ed]

What medium do you use to advertise the property? Just wondering. We live in Chicago but have 2 rental properties in Florida. I was transferred, otherwise we would still be there. If anyone ask me I tell them to never long distant landlord, but I must say it has worked out surprising well for us over the years. One property has had the same wonderful tenant that takes better care of it than most of the neighbors do that own their own home. However we tend to cycle through tenants every 1 or 2 years on the other property.

I simply list the add on craigslist and filter the potential tenants through phone conversations. I they fit my criteria, I simply use the in-laws to show it to them. Them I take care of all the background screening from here. So far it has worked great. Does anyone use anything else or listing? The longest it has sit empty is 2 months, but if it was any longer I was going to look at alternative methods for advertising.

I have never understood how or why folks would let a rental property sit empty. There is really no excuse. There are tons of great tenants if you are willing to simply put a few hours of work in.

[Derek - Freeat33]

I am interested to see how handle the day to day business of real estate. I will have to check out the articles from the beginning as I really think Real estate is one of the best investments. Thanks.

[Apex]

@Ed,

As I was saying to Kathy, I use Craigslist exclusively. I have used some other services but have not found them to provide much if any value.

Next week's column will discuss the process of finding tenants in more detail.

[Chirstopher McKenzie]

I love this article. I just bought and rented my first property in Ann Arbor, MI, although I live in NJ. I used to live in the condo complex so knew how well it was managed. I essentially have no worries about the external maintenance, have a handyman (well recommended) on call for anything that comes up, and rented literally within 12 hours of closing because I had done an upper-scale rehab to the kitchen and bathroom. I clear $350/mo less the cost of the handyman ($800 but necessary things and nothing after the first month), and my tentant is a grad student who's parents pay the rent. Guess their business? Real estate investing in northern Michigan. I hope she stays forever because I do use the listing agency to check tentant's CR etc and that costs me one month's rent.

[Venkat]

APEX,
If I may ask, what is the typical duration of loans on your properties? Like 30 year or 15 years.

[Apex]

@Venkat,

Every fixed loan I have is 30 years. I never do 15 year loans. I have not written my financing column yet but when I do I will go over why.

[peth]

Great advice and much needed motivation. My apt has sat a few months. I'll follow your good advice right away and hope to rent it soon! Thanks!