Speed v. Savings In Turnover

Is performing your own turnover work the best financial option?

We all know someone who loves to tell us about their $2000 jack pot they hit in Vegas, but they never seem tell how much money they lost to hit that jack pot. So are they really up $2000? Not likely. Or, I could use the example of my wife telling me she is going to return product ‘x’ to the store, because she found the same product for a better deal at another store. But what amount of time and resources are going to be spent to accomplish this savings? Will it really be worth it?

Now let’s apply this to rental property. We have investors from time to time who like to perform their own turnover items prior to getting a property back on the market. They do this in the name of saving money. The idea is great, but the results can turn into a loss pretty easily if not managed correctly.

I will use the example of a former client to demonstrate how this approach actually ended up costing this investor thousands, when he actually thought he was saving thousands.

The investor lived in San Diego and would insist on doing the maintenance and paint work on any turnover he experienced on his 4-plex. The turnover would happen and he would let me know that within 1-2 weeks he would drive to Mesa and spend 2-3 days working on the unit. Without fail, he would not finish and let me know that he would return within 1-2 weeks to finish the work, or ask me to then have our vendors finish what he did not. I would then have to perform another inspection to see what was left, then schedule my vendors to complete the work.

Being a full service property management company, I have a list of vendors that are familiar with, and able to get to jobs quickly. A typical vacancy should be turned in less than a week in most cases. With this particular investor, a turnover was taking anywhere from 3 to 6 weeks depending on his schedule and willingness to release any turnover tasks.

What to consider when evaluating actual savings:

Loss of rent. He never considered it and only focused on the $300-$400 in labor cost he saved. On a good turnover, I could have saved 2 weeks down time, which would have been right in that area of savings at the time. On turnovers that took up to 6 weeks he actually cost himself about $900 in lost rent.

What was his actual cost? He was driving a full size pick up truck 6 hours from San Diego to Mesa, AZ. Conservatively, that is $120 just in gas, round trip. Lodging, dining, it all adds up. I’d venture to say all of his savings were actually soaked up in the expense of travel.

What is his time worth? This is the big one that so many times get’s ignored. What did he miss out on in San Diego in the name of saving several hundred dollars? Work? Time with family? What value does he actually have on his time?

As I get older, I begin to realize the value of time. Such a precious commodity that I am not willing to waste anymore. I actually put a monetary value on my time, and if I can outsource something so that I can better spend my time on the big ticket items, then I do it. I could make a strong case this investor did not actually save any money with his expense and loss of rent due to the increased amount of time it took to get his units rent ready. Then when you factor in his actual time, this was a losing proposition every time. He lost and he didn’t even know it. He genuinely thought he was making the best financial decision.

This is one example, many times they are not this drastic. More times than not when a investor gets involved in performing the work, time get’s lost. Whether it’s a few days, or a few weeks, it can absolutely have a negative financial consequence if not carefully thought out and considered.


Tenant Screening Tip #2

Proper tenant screening is the absolute key to a successful rental property. Good tenants take care of the place, pay rent on time, which equals a happy owner. You could have the right property, at the right price, with the right management team, but if you get the wrong tenant, they can quickly turn your property from bliss to misery. In my previous blog post I revealed a tip on how to attract more applicants that will have incentive to be more honest in the application process. In these tenant screening tips blog posts I will not go over the traditional, or conventional methods that 100% have their place and are very important (credit checks, rental verification, employment verification, etc.). What I want to touch on is an unconventional method that serves as a support to all the traditional methods that we use.

Social Media.

That’s right, I use social media to get better insight on prospective tenants. Now how would this be useful or helpful? Let me give you a recent example. We had what looked to be a qualified applicant for a nice home in Gilbert. They had good credit and good jobs and had indicated on their application that they had a “Lab mix” as a dog. On this particular home, the owner was okay with a single pet with her approval. I looked up the people on Facebook and sure enough there were countless photos of their dog on their page. You could tell they loved their dog and she was a big part of their life. The perfect pet owner, right? Here was the problem, the dog was not a “Lab mix” as stated on the application, she was a Pit Bull. This would have posed a huge liability for the owner and their insurance would not have covered an incident with this breed of dog. Of course there are other methods of finding this stuff out like requiring a photo of the pet, inspections, etc. But by spending about 1 minute on social media, I was able to detect a major issue and expose an applicant that was willing to lie to rent this property.

Most of the time social media doesn’t support or expose prospective tenants, and that is fine. But every once and a while it really helps us avoid a a potentially bad situation by identifying a discrepancy in the application that a credit report might not find. If it’s there to use and possibly help in deciding whether or not to rent to someone, then you should use it!

Tenant Screening Tip #1

Attract the best tenants possible all while being ethical.

For the last several years, the Phoenix rental market has been on fire, and even more so of late. If the rental product is quality and priced right, it should rent within a few days. This has given a nice advantage to the investors, and has made life a little more difficult for the renter. The most common method to rent property is to collect applications, along with the application fees, and then select from the pool of applicants. This has given landlords choice, which is a great thing when trying to put the best tenant possible in their rental property.

So what happens to the other applicants? They get declined.

So what happens to their application money? The property management company keeps it.

That doesn’t seem right, does it? Many companies are taking advantage of the hot rental market and using this as a money making scam. Yes, I said scam. The reason so is they will collect applications for a week, full knowing that they will only accept one. This is a disservice to their owner by waiting and possibly losing a good applicant to another property, and the applicants who are waiting in hopes of getting the property who will lose out on time if declined. The reality is if there are a large number of applicants for a particular property, then some qualified applicants are getting declined. I can’t tell you how many times I’ve had a prospective tenant ask “are there a lot of applications on this property?” They ask that because they are sick of, or just cannot afford to lose more application money. In a market like this, properties rent fast and it is very competitive.

I don’t believe in this method. Here is what we do:

I make all application money refundable. Am I leaving money on the table? Of course, but let me explain the payoff. The advantage to this approach is 2 fold:

  1. Applicants will apply without fear of losing their money. This will provide more opportunities to my owner, whom I represent to locate and place the best tenant possible.
  2. There is a caveat to the application money being refundable. The applicant must answer everything 100% truthfully on their application. Tenants don’t want to chance losing their application money, so they open up about everything. This gives me, as the property manager, so much more insight that a credit report might not tell.

Despite these clear cut advantages to making application money refundable, it’s just the right thing to do. I can’t tell you how many applicants have thanked our firm for this practice. Placing the right tenant is part of the foundation to having a successful rental property. This is just one of the many unconventional methods that we deploy to attract and secure the best tenants our market has to offer.

Best Strategy For Long Term Rental Success

This single method should net you thousands over a 5+ year period.

If there is one thing I have learned with rental property, it’s that there many ways to get to the same destination. Everyone has their own strategies and ways of business. I find it fascinating to learn how certain investors do things and see what I can pick up to add to my own strategies. I have managed for all types of investors and had a front row seat on how crucial decisions have played out. This has given me a unique perspective and shaped how I manage my own investments. Now by no means am I re-inventing the wheel here, but there is one question I ask my self every time there is a decision to be made:

What decision will make me the most money over a long period of time?

It’s a very simple question, but what it does is completely removes me from the moment and allows me to get a macro level view, versus the in the moment micro level view. When we can zoom out, many times we can see the entire picture a little clearer. What is my goal, make the most amount of money this month, or over a 5, 10, or even a 20 year period? This perspective forces me to make good, solid, long term decisions that will serve my investment well. Let me give a few examples:

  1. 20 year old AC breaks and needs a new compressor. In the moment thinking says replace the compressor for $1000 rather than replace the ancient unit for $4000. That saves money now and helps that given year’s return. But is that the wisest choice? Is putting $1000 into an old unit that will inevitably have to be replaced anyways down the road a good call? Does having a newer, more efficient unit keep my tenant happier and promote long term tenancy? Will it allow me to get a higher rent? Let me tell you, I’ve rented to tenants who were moving due to high utility bills, constant issues with their AC, and I’ve lost tenants due to the same. I’m with you, it sucks to dump $4000 into a new AC unit, but it does improve the product and can be argued quite well that it is the best long term decision.
  2. Tenant causing problems in a multi-unit building. It’s hard to kick out a paying tenant, and many investors put up with way too much sometimes to avoid the dreaded vacancy and loss of rent. Most of the time they don’t consider the collateral damage they will inevitably incur by keeping the problem tenant. When you take my approach and zoom out, it makes it really easy to remove the problem tenant. You deep down know they are not a long term fit, you know they will end up running off your good tenants, so rip the band aid off and get it over with. From a long term perspective, it is the right decision every time.
  3. It’s a little slow renting a unit and a risky applicant appliesThis scenario is where I see most investors get into trouble. They are completely immersed in the ‘now’ and end up making a poor choice that ends up costing them thousands. Many times it is because they are charging a rent that is too high, and in turn don’t have the quality options to choose from. So rather than let their property sit vacant, they take the chance. On the other hand, if you ask yourself the golden question, will this decision make me the most money now, or the most money over the next 5 years? The answer becomes quite clear and you can avoid the high risk tenant that quite frankly, is not worth the risk.
  4. Send the plumber or handyman on a tub leakI’m all about the handyman on minor things, but one thing I’ve learned is when there is a shower valve, or any other slightly more complicated plumbing issue, the plumber is the way to go. Short term thinking says go with the handyman, I’ll get a better deal. The experienced, long term question of ‘what will net me the most money over the long haul’ says use the plumber. Yes, it costs more, but my experience has proven that the problem goes away for good. When you get the handyman tackling issues like that, it always seems to come back at some point. This is a minor example, but still holds true to the philosophy and approach.

This approach will help guide the right decisions in most cases. I see far too many investors relying only on short term money decisions, which differed maintenance, less quality tenants, and ultimately costs them thousands over time. Most of us bought rentals for the long term benefit, so make the decisions now that will best serve that original plan.