Last Tuesday my tenants did not show up at Eviction Court, so I was awarded possession of the property. Afterwards, I immediately drove to the property to find it trashed, as expected. I own this particular property. The tenants had lived there since 2001 and had been good tenants until about a year ago when they started having payment problems. I worked with them as best I could. They would fall a month behind. Catch up. Fall behind again. Catch up. And it became a cycle that I normally won’t allow.
But after I discovered they had their deadbeat adult son living there, and he mouthed off and cussed at Sylvia when she knocked on the door last month to see if they were still living there (after we again received no rent and no communication), I decided to call it quits and I initiated the eviction process. I knew in doing so I would be incurring now a fairly expensive makeready and turnover expense.
This brings me to a point I always try to make with prospective investors thinking about buying their first rental property. If you can’t afford to take the occasional big financial hit that can happen to any landlord at any time, don’t buy rental property. As I walked through my home, strewn with abandoned belongings, including a wrecked motorcycle left in the garage, I concluded quickly by rough estimate that I was looking at a very costly turnover, probably up to $12,000 depending on what I ended up doing on the rehab. This house will need the full treatment.
How did I arrive at $12,000 of the top of my head? I’ll itemize it below:
$2300 = Lost rent prior to the eviction.
Almost two months lost rent because I was slower than I normally would be due to my long-term history with the elderly tenants and hoping they would come around. A managed property would have been dealt with much sooner, so I broke one of my own rules and it cost me almost an entire additional month of lost rent by being slow.
$1250 = additional lost month of rent for rehab and marketing time. Could be more if it takes 60 days to lease.
$550 = Trashout and hauloff. Filled one 16ft trailer completely full.
$2,000 = Interior full paint. Needs walls, trim, doors. I figure about $1 per sqft plus 10%.
$4,000 = complete new flooring throughout, carpet, faux wood, hard tile in master.
Now is the time to go ahead and redo the master bath and shower with some really nice tile to replace the old sheet vinyl and plain white shower tiles, which both look terrible at 12 years old. This will make it easier to rent and is a justifiable upgrade for me personally.
If I wanted to, I could simply re-grout the shower, go back with all carpet and sheet vinyl and the cost would be about $1500 less.
$300 = Utilities. I always figure about $10 per day on vacancy. It’s just a rough estimating method I use.
$800 = New window treatments. Now is the time to upgrade the 12 year old miniblinds to newer ones, and also add some upgraded faux wood blinds to just the master bedroom and living area. Again, bringing the property up to a higher standard than before and making it more desirable to prospective renters.
$500 = Full day of Maintenance/Reapirs.
Going though all the mechanical components of the home and addressing any issues. Could be more if we run into something such as needing a new water heater, replacing a dishwasher, etc. It’s a 12 year old house so some of the components may be ready for replacement.
$100 = Rekey the locks
$1,000 = Miscellaneous Other stuff. Add 10% to the above total.
$11,500 = Total Estimated cost of this rental property turnover.
This doesn’t include the cost of my time, which is lost productivity, and I will write another blog article that recaps all the phone calls and trips to the property that a turnover like this requires.
Now, if I were a novice investor who bought this property zero down two years ago, and didn’t have the resources to take care of it, I’d be crapping my britches about now because the Property Manager just called and said I need to mail a check for $5,000 to get things started and will need another $5,000 to $7,000 in a couple of weeks. If you’re not ready for that phone call, as rare and unlikely as it may actually be, don’t become a rental property owner.
The above $12,000 turnover cost represents about 10 months rental income for this house. We tell investors that you MUST, at all times, have 6 month’s rental income set back in case you hit a rough patch with an eviction, costly turnover and/or extended vacancy.
The truth is, if this was a managed property, I would be able to keep the total cost at or about 6 month’s rent by skipping some of the discretionary upgrades and improvements. We also would have filed the eviction a lot sooner if it were someone else’s property.
But is $12,000 really the true cost?
There is also another factor to this equation, which is, I’ve spent very little on this property over the 7 years I’ve owned it. I replaced the air handler and I think the dishwasher if I remember correctly. Other than that, nothing but routine preventative maintenance.
This tenant was in the property when I bought it, so until now, I’ve not had any vacancy or turnover costs. So even though they are creating an expensive turnover for me now, they actually saved me a lot by staying in the property for so long.
In other words, had they moved out after the first 12 months, and if I would have had 2 or 3 additional turnovers in the following 6 years (which would be normal), the cumulative amount of those turnover costs might very well have exceeded what I’m going to spend now.
We prepare investors to expect every turnover to cost 3 to 6 month’s rent in vacancy loss, leasing expenses, maintenance and repairs, etc. Having avoided any turnover in 7 years, I’m ahead at least 1 to 3 turnovers, which would have been been $3600 minimum (one 3-month-expense turnover) up to $20,000 (three 6-month-expense turnovers) worst case scenario, spread out over those years.
So, in that context, as brutal as this $12,000 tunover expense may seem, in the long run it’s actually not bad, and I get to knock it out all at once.
But a rough eviction and turnover like this does not always follow 7 years of no turnover. An ugly one like this could theoretically happen two years in a row, and I’ve seen it happen.