What’s More Costly: Rental Vacancies or Filling Rentals With Subpar Tenants?
One of the most important factors that today’s real estate investors need to watch out for is choosing partners and professionals who have really mastered the dynamics of tenant screening and occupancy. Each investment opportunity is only as good as the execution. Without a great handle on tenant management, the results can be disastrous. Unfortunately, many investors are still incredibly lost in this area. And that can get extremely expensive very quickly.
Both poor tenant performance and rental vacancies can kill cash flow for real estate investors. It takes both a detail-oriented property manager and intuitive expert who knows how to evaluate the whole picture to figure out which is more costly.
How Much Does Credit Score Matter?
It is smart to have systems in place for these things, but many are getting hung up on the wrong data points. Credit score is the most common one. Through screening tenants, I have seen that you can still walk out of bankruptcy and have a 700 credit score very quickly because you no longer have any debt. That doesn’t mean this tenant will ever pay their bills on time. Someone else might have one misdemeanor on their background check from 4 years ago, but is otherwise the ideal tenant. Someone else may have a low credit score because they don’t use credit but have awesome income, a great job, and good assets.
Finding Correct Rates for Rentals
Another reason that investors fumble the ball is unrealistic asking prices for rental homes. Never take what a real estate agent told you that you could get in rent as the truth. Always verify it for yourself from other sources. If there are similar units for $500 less a few blocks away, they are going for the cheaper units. The market will tell you how much your property will rent for. It’s best to listen and make any necessary changes.
The True Cost of Vacancy
Do the math. If you’ve got four $900-a-month rentals sitting vacant for 6 months, you’ve just lost $21,600! You’ve made zero returns. In fact, given you need the utilities on and have property taxes, you are actually incurring negative returns. Then we all know that risks of damage are higher on vacant homes.
If those properties were mortgaged, you might be pulling $10,000 extra out of your pocket during that period to hold on to them as well. You’ve got to ask yourself, “How many properties with negative cash flow each month can I handle, including if my earned income is cut?”
The bottom line is that whether you are investing in rental properties solo, with partners, through a fund, or via a crowdfunding platform, make sure you and the property manager really know the local market, know how to decipher the data and make common sense decisions, and are putting as much consideration into the math of vacancy as you are flawed credit scores.
Ideas by Sterling White