oftentimes especially when we get

started people tend to overly simplify

and frankly incorrectly look at numbers

where they do something along the lines

of my return is going to be rent minus

mortgage minus insurance and minus

property taxes and everything else is

profit But a big one is the cost of a

house or getting it ready when a tenant

leaves and you want to place a new

tenant 8% equates to about 1 month of

vacancy per year Now if you’re turning

tenants every year you’re not going to

run a very profitable business Welcome

back to our special podcast series The

20-minute Investor where we bring you

actionable nuggets and insights from our

real estate investing journeys in

bite-sized 20-minute episodes I’m Aaron

Amin My wife and I built a portfolio of

eight cash flowing rentals across three

states while working full-time and

raising a young family And I’m Nathan

Miritham I’m a husband father a tech

executive who built a portfolio of cash

flowing rentals across two states from

over 2,000 m away Together we co-founded

the Remote Real Estate Academy where we

coach investors on how to build their

own portfolios of cash flowing rentals

from anywhere in the world So today

we’re going to wrap up our five-part

series on the biggest mistakes remote

investors make And this one applies

actually whether you’re investing down

the street or 3,000 mi away And the

mistake is failing to plan for vacancies

and tenant turnover So we’re going to

talk about how to run your numbers the

right way how we budget for vacancy and

what we actually do to keep great

tenants around longer So let’s jump in

All right So vacancy This is a fun one

because I think often times people just

assume that they can get a good tenant

in place and keep them but it is also

one of the biggest expenses you can face

if you’re not careful about it So let’s

start with just like the overall rule of

thumb and percentages I know we talked

about this in one of the previous of the

mistake series with cash flow analysis

but do you have a blanket percentage

that you use when you’re looking at

vacancy

i do but maybe to if I may just step

back for a second before we get into the

actual details of sub because it is I

don’t know if it was the last episode

the one before one of the previous

episodes that we recorded we talked

about this and I think it starts with

maybe a quick reminder We were talking

about how often times when people

analyze a deal or run their numbers or

when worse in my opinion people online

pitch a rental that they want to sell

and show you the quote numbers and the

return that it’ll generate Often times

especially when we get started people

tend to overly simplify and frankly

incorrectly look at numbers where they

do something along the lines of my

return is going to be rent minus

mortgage minus insurance and minus

property taxes and everything else is

profit And we talked about that in

detail So go listen to that episode But

that’s very far from the truth right and

one of the things that typically people

tend to forget to account for when they

run their numbers of course you have

things like property management you have

capital expense expenditure reserve you

have repairs you have things like that

But a big one which we talked about in

this previous episode is the cost of a

house or getting it ready when a tenant

leaves and you want to place a new

tenant And to put that in context maybe

to start off with specific numbers and I

didn’t pull this up before now but I’m

just going off the top of my head for a

relatively recent So think of a

relatively vanilla 3bed two bath,000 ft²

home and tenant has stayed in it for say

3 to four years when they

leave and you want to get the property

ready for the next tenant to come in

there’s always going to be you know work

that you need to do do to the property

from maybe as simple as painting a few

rooms to maybe worse right patching

holes in walls and painting the walls

and replacing flooring and maybe

fixtures and things like that And that’s

what we talk about when we talk about

cost of a tenant turn And I want to say

the most recent one that comes to mind

for us it was something like $4,000 I

think if I remember correctly This is

off the top of my head but ballpark And

that was a

relatively quote simple or vanilla turn

and make ready So it’s basically paint

and flooring I think if I remember

correctly and everything else was okay

That $4,000 as an example here will be a

big hit to your return if you don’t

account for it Sorry that was a big step

back and segue into your original

question but we do a few things in terms

of numbers specifically So obviously and

again we talked about this in this

previous episode that we did but we

account for just ongoing repairs So

hopefully that percentage in our case

it’s 5% 5% is not gospel Everybody needs

to do their own numbers talk to their

own property manager It’s a number that

works for me and the properties that we

buy in the market that we buy those

properties It is not a number the

blanket statement everybody use 5% Just

want to be very clear that works for us

Hopefully a lot of the ongoing

day-to-day repairs and things that break

can get covered by that In addition to

that we have I mentioned it a second ago

but we put another 5% aside as reserves

for bigger expenses So that’s not

typically associated to a tenant turn

but things when you have to replace a

water heater or a furnace or a roof or

some of these big ticket items So we put

money aside for that another 5% One

thing we touched on in that previous

episode as well that we like to do is

try to put every month put a certain

number of money aside from the incoming

rents to anticipate and build treasure

chest for having a certain number of

dollars set aside for when a tenant

leaves and we have to get the property

ready floors paint fixtures whatever it

is that has already been reserved or

prepaid for by the current tenants And

we typically do $500 a year because for

us if a tenant stays on average four to

five years that builds up a decent

treasure chest of reserves for fixing up

the property And I’ve got more stuff to

say but maybe I’ll shut up for a second

and see what you have to say No context

is super helpful and just naming a

percentage without framing the overall

context of what it takes to turn over a

property and get a new tenant in is is

not very helpful So I appreciate you

framing that whole thing And I think

what the theme I hear there is that

these reserves that we set aside for

things like normal normal expected

repairs bigger capex

expenses vacancy itself which in my mind

the definition of vacancy is when there

is nobody in there paying rent So it is

the it’s the amount that you’re

budgeting for to cover that lost rent

potential But that is not the only

expense of vacancy It is also like you

said painting replacing carpets if

needed all the patch up and turnover

work the lease up fee that goes to your

property manager So you’re pulling from

all these different allocations to come

up with the whole true cost of turning

over a unit And I think that’s actually

the point of this episode and the point

of this lesson is that vacancy in and of

itself is not in a vacuum The lost rent

potential is one line item on your P&L

and your allocations but you’re actually

pulling from a bunch of different

categories So if you’ve been collecting

rent even if you have a tenant save for

2 or 3 years but you’ve been shoving all

that excess gross cash flow into your

operating account and then drawing it to

pay your cell phone bill and go on

vacation then when that 3-year period

expires and you haven’t been acrewing

properly that’s going to hurt And that’s

the point here And this lesson really

does apply whether you’re local or

remote But I think in particular when

you’re remote you have less ways to

solve problems if you have not properly

budgeted and acrewed for those expenses

So I think it’s really important the

picture you painted where there’s

different categories that you’re pulling

from to cover what is considered to be

the holistic expense of a tenant

turnover So you the other thing I

remember you mentioned in the previous

episode was that you because you’ve been

in your market for as long as you have

because you have an established track

record with your property manager you

can actually come up with a better

estimated percentage of what all these

things cost If you’re a brand new

investor then you in my mind I usually

air on the side of caution and I use a

number like an 8% vacancy If I’m going

into a new market where I don’t fully

understand what what it’s going to take

to retain long-term tenants I’m still

feeling out my processes and how to

settle in find the right tenant match

for the building that can hopefully have

a long-term tenency 8% equates to about

one month of vacancy per year Now if

you’re turning tenants every year you’re

not going to run a very profitable

business So I’m not suggesting that’s my

target or that’s my goal is to turn over

tenants every year But what I am

suggesting is that when I use that

number if stuff’s still pencils out and

I’m using an 8% vacancy and maybe a

slightly higher repair and capex number

then I know that if I got a little green

light on my deal check or my Remote Real

Estate Academy deal analyzer there’s

these little red light green light Does

this deal work for the parameters you

need if I’m budgeting conservatively and

the light is still green then that is

exactly what it is to me It’s a green

light this deal can work even under the

circumstances of me having to turn this

over every year And then of course the

goal is to outperform that and get

tenants that’ll stay for I would love to

know your answer to this of what you

consider to be like a good metric for

how long people stay But in my mind if I

can get an average stay of 2 and 1 half

to 3 years on my long-term rentals that

are in the kind of working-class

neighborhoods to me that’s pretty good

Obviously you would like longer but I’m

curious to get your thoughts on what do

you consider to be a good healthy tenant

like tenure if you will

Yeah that’s a great question It’s not

like we have a goal that we’re trying to

reach We’ll do everything we can to

reach a goal of say x number of years

per teny It’s not a goal of ours But

that said I’m sure folks have heard this

and it’s said a lot in kind of the real

estate investing space but one of the

most expensive and costly things that

will destroy the returns of a rental

property is a tenant turn for the

reasons we’ve just discussed is you can

build up all this cash flow and maybe

even if you don’t spend it you just put

it all aside build it up for a year two

whatever Then a tenant leaves and now

you just use up all that cash flow to

get the property ready especially if you

haven’t conservatively run your numbers

and budgeted for tenant turns So we do

everything we possibly can to keep

tenants as long as possible So that

starts with our buy box where we try to

make sure we are in decent school

districts because we as a parents we

understand that if you get your kids and

all their crap into a house that has

relatively decent schools it’s pretty

hard to move when you got a basement

full of kids stuff We’ve all been there

I think or you and I at least have been

there So it starts with that but then

it’s clean safe property So we do

everything we can to have a clean safe

property We do everything we can to keep

them Like when we do annual rent

increases we don’t go super aggressive

Is if we rent at X and the market is 50%

above that we won’t go from one year to

the next So here’s a 50% rent increase

We’ll do a smaller increase to help

absorb our increase in costs but we’ll

do everything to make sure the tenant

stays So sorry long long answer We talk

to them as much as we possibly can so

that we have an open relationship and we

figure out what and when I say we our

property manager and tenants talk and

then that gets relayed to us just to

make sure that we have open lines of

communication and we do what

is needed to retain them as long as we

possibly can That said looking

historically at

our average tenency I think we’re

probably going on about 5 years And this

is off top of my head I didn’t run the

actual numbers but I maybe four four to

five It’s been a good run So that would

be in my mind a pretty exceptional

result right if your average tenants

stay above four years that means that

you’re managing communication you’re

managing expectations you’re keeping

good care of the property you’re

probably selecting the right types of

tenants that are qualified to live there

and are in a stable enough position that

they can afford those incremental rent

increases So that’s an example in my

mind of a very functional end-to-end

process because you might have people

that are really nice that you like You

might have people that can afford rent

for a certain period of time but they

can’t afford the eventual increases

Maybe the rent that they enter in is at

the very high end of their price range

There’s a lot of things that can go

wrong throughout a four or five year

period with increasing marginal costs So

I think it it just highlights the

importance of understanding your tenant

pool and who the right profile is And I

say profile and I want to be very

careful with that word because obviously

discrimination and you got to be really

careful not to of course um unfairly

discriminate against anybody but there

is such a thing as trying to understand

meet the market where it is And if

you’re in a D-class neighborhood and

you’re trying to charge B-class rent

like the type of person who eventually

might pay that if anybody is probably

not the right person long term to live

in that area So you do have to really

understand the dynamics of the market

you’re in the people you’re trying to

attract the neighborhoods you’re in and

those dynamics whether it’s the school

districts or the crime whatever the

stats that people care about in those

areas those all play into whether you

can really retain people or not And I

think a four plus year is amazing And

that’s that is why some of a lot of what

we focus on when we’re teaching people

is how to understand each component of

that of that I I don’t know whether to

call it a funnel or just the tenant life

cycle but from selecting to retaining

And I think maybe I would love for you

to share a little more too about how you

and your property manager manage the

like renewal conversations when those

times come Yeah And before I jump into

that there’s another piece to this that

helps understand and keep checks and

balances with our tenants and how they

take care of the property We do annual

inspections of every So our property

manager will ask if we want to It costs

something It’s not excessive but there’s

a fee to it but they will do an annual

inspection of these rental properties

And what that does is the tenants know

that at some point during the year

during their lease the property manager

is going to come by and walk the

property to make sure it’s in good

standing taken care of so on and so

forth So we can also through that ensure

that we have tenants that are taking

care of the properties because if not

then we know we can choose to for

example not renew a lease We also

touched on this I think in a previous

episode as well but some of our

properties have housing authority or

section tenants in there and the housing

authority also has their annual

walkthrough and inspection which helps

keep things in check But yeah when we

get to the so obviously we use a

property manager so it’s not like I’m

having these conversations with the

tenants but the instruction that I give

the property manager is like I want to

do everything and I have the same email

I send every single year every time a

lease comes up for renewal on every one

of our properties It’s same email that

basically says I want to do everything

reasonable and possible to keep the

tenant in I also as everyone else have

increasing expenses property taxes

insurance repairs anything I want to

make sure we do what’s best to keep them

in but also some form of increase And I

would much rather do a $25 $50 rent

increase on a $1,500 monthly rent and

keep the tenant rather than that tenant

saying “I’m leaving and then it’s going

to cost me four or five grand to to fix

the property up.” Even

though if this were a vacant property

and I were to put it on the market today

I could get 1,800 in rent right i’d

rather keep the tenant and get 1525

rather than risking it and trying to

push it to 1,800 or 1,700 or whatever

and have the tenants leave Yeah 100% And

I think a couple things I want to just

highlight The section 8 I know we’ve

talked about before We actually have a

assisted living operator renting one of

our homes In both of those scenarios in

mine it’s the state and in yours I know

it’s the housing authority but those act

as these I think they’re advantageous

checks and balances because then they’re

not work the tenants are not only

concerned about whether or not they can

impress you as to how they’re taking

care of the house There’s actually an

outside party coming in to verify that

the house is in good working order that

any safety concerns are addressed and

that ultimately like everyone is doing

their part both the tenant and the

landlord And I appreciate that

especially as an outofstate investor

because I don’t know you don’t want

people too up in your business But I do

think that when you have multiple sets

of eyes on it between a property manager

whatever that authority is the tenant

and the landlord you’re more likely to

keep things in check and keep everyone’s

expectations aligned I think when things

go wrong is when there’s a gap between

people’s expectations and the reality of

the situation So even something like

that $25 a month increase if a tenant is

just expecting things to stay flat that

might have been also a failure on our

part to set their expectations when they

join right it could be written in your

lease It could be part of the

communication you have with them that

there will be a marginal rent increase

every year to keep pace with inflation

and rising costs This isn’t just because

you’re a greedy landlord out to try and

put them on the street It’s because you

incur costs from ownership And a lot of

people fail to understand that But if

you’re good about communicating that in

an empathetic way where you acknowledge

that this is additional money out of

their pocket all you’re really asking

for in return is for them to acknowledge

the same that you have rising costs for

holding And so I think that’s all just

about how to manage the tenant life

cycle I mean if you’re going to try in

the example I was given before if you’re

going to try to from one year you know

when your lease is up and you you’re

having those conversations for renewal

with your tenant and you’re trying to go

from 15 to 1,800 yes you’re going to

come across as a greedy landlord most

likely If you do these more nominal

changes because and you explain that you

also have increasing costs then usually

the conversation goes much smoother Yes

absolutely Hopefully this gave a good

idea of some of the ways that Nathan and

I think about how to retain tenants and

avoid big expense of vacancy and how to

underwrite it into your initial offers

that you’re making on remote rentals So

thank you guys for joining on the

20-minute investor and we will see you

next time Thank you for making it to the

end of today’s episode As you may know

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