Posted Tuesday, March 12th, 2024 by Enterprise Property Management
True Cost of Tenant Turnover Exposed: We discussn the often overlooked benefits of tenant retention vs tenant turnover, revelaing the hidden costs and risks associated with finding new tenants and why keeping existing tenants is a financially smarter strategy. With advice drawn from over two decades of real estate experience, this discussion reveals practical strategies for minimizing vacancies and optimizing profits. Whether you’re a new investor or an experienced property manager, this episode offers essential tips and insights for enhancing your real estate portfolio’s performance through effective tenant retention techniques.
Richard
0:00:15 – Welcome back to another episode of Behind the Curtain Real Estate Podcast. Today we’re going to discuss the underestimated value of retaining tenants versus the potentially high costs and risks associated with replacing them.
Sponsorship
0:00:53 – Behind the Curtain Real Estate Podcast is sponsored by Memphis Real Estate Advisors. Memphis Real Estate Advisors is a realtor team led by husband and wife duo Aaron and Alyssa Ivey. Bringing over 20 years of experience in both residential and commercial real estate sales and property management. The team works with investors, buyers, and sellers as a member branch office of the national franchise EXP Realty. To get in contact with Memphis Real Estate Advisors, visit them online at memphisreadvisors.com or call 901-671-1015.
Richard
0:01:15 – Well as I begin thinking about building a real estate portfolio for myself, I’m very conscious of such things as how much vacancies could cost me, you know, when there’s no tenant in my property and I’m not earning an income, how that could impact me long term versus trying to retain a tenant and eliminating some of the headaches along the way of replacing that tenant. So I want to talk today about the real cost of tenant turnover. Let’s begin talking about the experience from you as a property manager. So just to define where the area that we’re talking about specifically, we’re talking about Memphis, we’re talking about Shelby County, Tipton County and Fayette Counties. What are you seeing in terms of tenant turnover? How long typically would a home be vacant when it’s re-leased?
Aaron
0:02:10 – You know not including current economic factors that affect tenants decisions to stay or leave or to remain or upgrade their rental dwelling it’s an average of about 60 days. Okay, over the course of the year you’d expect that to fluctuate as an average? Sure, I mean I think there are several different factors that will lend to the fluctuation of time frames and also the basis upon people are making a decision to move or stay. I remember in the moving very quickly.
Richard
0:02:53 – So let’s just talk very quickly about how long does it actually take to turn a property? What what goes into that and how long would that take?
Aaron
0:02:59 – As much as people don’t like this answer I think they need to budget for three weeks of make ready processes because these we were talking about houses right these aren’t apartments
Aaron
0:03:36 – There’s a bit of a disconnect with investors when they own apartments or maybe they even rent a condominium. And they say, no, it should be easier than this to turn it and to make it ready for the next tenant. And the reality is when you’re dealing with a single family detached freestanding property, there are exterior work items that need to be performed as much as there are interior. And there are no shared systems. In an apartment complex, of course, you’ve got shared heat, right? You’ve got shared electricity. You know, we’re having to, all of these things for each individual home as if it is its own rental dwelling, which is what it is. It takes longer for a house than it does for an apartment.
Richard
0:04:13 – So let’s talk about some of the direct costs that would be, and I mean direct costs to the actual homeowner in the re-leasing process. What kind of things would they be expecting to pay out? And we’re obviously considering a period of time, you suggested 60 days at the moment, where they’re not going to have any rental income. So what costs do they incur in that releasing process?
Aaron
0:04:31 – I think the very first thing is we need to recover the operation of the property itself. of the responsibility of operating that property to the tenant. When you take that back, there is no longer cashflow to help you offset the costs that are there. Vacancy can, you know, on paper be a very detrimental thing to the cashflow success of any individual property, which is why we wanna keep it as low as possible. To answer your question, the very first thing they immediately have to do is put the utilities in their name, which these days in Memphis is going to require a deposit of some kind. There may even be vacancy loss or more days added to the vacancy because our local utility might get behind. One of the things that we’ve seen recently is that they are understaffed, and so they’ll go ahead and just shut off the electric meter, the gas meter, and the water meter, and then they make us go out and meet them for an appointment where they inspect the property and then turn the utilities back on. This one scenario that I’m talking about could cost a homeowner up to 10 days of vacancy. Once we have the utilities back on in our name, which hopefully will not cost us more time, then we begin to evaluate the property for what it’s going to require to be rented again, whether the house needs an updating, which isn’t often, right, that’s an uncommon thing, or if we can just clean it up, put some paint on the walls, make some basic renovations, and then put it back out on the market. The general period of time for a turn is roughly 14 days after the house has been pulled back into the direction of the owner and property manager. The cost for a typical three-bedroom, two-bath house for painting the interior, if the entire interior needs to be painted, could be as much as $2,500, and that’s just for walls, not including trim and doors. If there are other specific repairs that need to be made, which are requiring a tradesperson, such as an electrician or a plumber, to come in, then the cost for those particular items will be higher. And then one of the things we try to do to control those costs are to have a one-stop shop with a single contractor who can do all of those things and help us determine whether or not we have to use a specialist.
Richard
0:06:36 – Yeah I would say that those costs for doing paint jobs, any renovations are indirect costs as opposed to direct costs. Those are costs that are associated with a tenant having lived there that if you were to just continue to lease to the same tenant those would not be necessary.
Aaron
0:06:58 – Yeah I would absolutely agree I you know if we’re contrasting a vacancy period versus renewing in essence what you’re doing is you are kicking the can down the road for necessary improvements or upgrades in order to attract the next tenant. So it doesn’t completely remove that cost, you still need to budget for it and have that in your plan for the next two to three years so that when that tenant moves out you’re not surprised at the condition of the property, you’re also not surprised at how outdated certain things may be. Believe it or not people, at some point your brand new house that you just built and moved into is going to be outdated. And the same thing goes for rental properties too. Cabinets, for instance, and countertops, whether they be vanities or in a kitchen, they’re dated in 20 years. And they’re also worn out. And so we need to be thinking about these capital improvements. How much is it going to cost for my new kitchen? Now, so that everybody knows, I’ve probably only replaced 10 kitchens in my career during a make ready turn, okay, during a vacancy. Usually what happens is we replace the kitchen or the bathroom vanities during the flip or during the initial acquisition and improvement. And so if you’re holding a property for 10 or 15 or 20 years, you probably won’t have to replace a kitchen. You may have to replace a bathroom vanity and there are other more typical, you know, higher cost upgrades that you have to do throughout the course of your ownership.
Richard
0:08:32 – So are there any circumstances where actually turning the tenant could be beneficial to renovations?
Aaron
0:08:37 – Yes, I think if you purchase a property with a poorly performing tenant in the property upon your acquisition of the home, it is in your best interest to go ahead and get rid of that tenant. Here’s the easiest way to get rid of a poorly performing tenant. You purchase the property. During the escrow period you’re going to see when the lease is over, when it expires. If you’re within a 90-day window of that lease expiration, I would say to anybody anywhere in the country it is probably a good idea, although check with your professional locally, probably a good idea in a 90-day window to go ahead and send them what’s known as a notice to vacate. So a notice to vacate is a legal, legal notification in the form of a letter. We also send them by email and then we also call the tenant and we let them know you need to move out. As the landlord, as the owner, you have the right to tell the tenant, I don’t want to renew this lease and I would like for you to leave. You’re not accusing them of anything when you do that. The law says that you have the right to decide to do with that property whatever you want to do with it, within reason. You can’t break a lease, but you can interpret or anticipate what the end date will be and then go ahead and tell them you need to go. You know, you need to move, right? So by taking that step, what you’re doing is you’re, you’re eliminating their poor payment performance and you are also retrieving the house back again to be able to, um, upgrade it or maintain it in such a way to where you actually could get as much as twice the rent for a good performing tenant, which, you know, your management company should be able to vet and say, yes, this person is a good bet, and I think that you should go on with them based on what we see in the application. When you inherit a tenant, you have none of that information. You will not receive an application, and you cannot decide after closing escrow that this tenant should go. Like you can’t just say, well, I want to switch tenants now. You’ve got to respect the lease that came with the property when you bought it. That’s probably the number one most advantageous Opportunity that there is for replacing a tenant to improve your cash flow.
Richard
0:11:01 – So the costs just to summarize that we’ve talked about so far is You’ve got mortgage payment that you’ll still be making when you’re not making a rental income So just for argument’s sake let’s say this is a $150,000 property based on the 1% rule, my mortgage is about $1,200.
Aaron
0:11:21 – I mean, I think it’s probably lower than that. Investors usually come with a 50% down, 25 to 50% down. I’d say on a $150,000 house, hopefully their indebtedness is only $75,000. That would be the best case scenario. So your mortgage in that situation is between six and seven hundred dollars per month which should include taxes and insurance. Of course that’s not going to include everything else right?
Richard
0:11:44 – Based on what you just said then if we factor in fourteen hundred dollars for a 60-day period you got the twenty eight hundred dollars you mentioned for a repaint. What other expenses might they incur? They’ve got the utilities which in Memphis I can’t see it being more than about 250 over a 60 day period. And then you’ve got, let’s say you’re using a property management company, what direct costs would be associated there?
Aaron
0:12:16 – So specifically talking about property management fees, the property manager, if they are managing the turn, you know, the painting, the cleaning, new carpet, and other repairs, they’re going to be charging a fee for that. We charge a percentage of the work that’s actually being performed, and our fee is also flexible, you know, and so a lot of people, when they read our management agreement, they’ll say, well, I don’t want to pay this fee, and we’ll say, hold on. When we’re dealing with a higher cost transaction, similar to a flip or a turn, which is what we’re talking about right now, that cost really comes down and should come down. I would say do not pay more than 10% for a property manager to do a make ready turn on a vacant property. All right, so that’s a cost, your property manager’s cost. Next let’s talk about vacancy fees and leasing fees. Most property managers are going to want for you to pay them a small fee during the vacant months. The goal of property management, of course, is to make sure that we have income coming into our company when we’re managing your property, whether or not it’s vacant. Now that might fly in the face of a lot of people that do their own property management, because obviously they know they’re not getting paid, and one of the number one complaints that we get is that why should we get paid if they are not being paid, right? Like, they want there to be some sort of painful incentive and for us to feel the same pain and sense of urgency to have that property occupied again as quickly as possible and cash flowing as quickly as possible. Our vacancy fee is extremely small, it’s $25 per month. That’s like 70 cents a day, right? Like it’s nothing for us to be in the home, monitoring the work that’s going on marketing working our internal processes $25 in my opinion for the value that you get for all the work that we’re doing during that time I think that’s a bargain but then there’s the leasing fee now leasing fees are different all across our city let alone across the country a leasing fee in Memphis for us is roughly six to seven hundred dollars on average. That’s for a single-family home. I was talking to one homeowner this morning that said that a property manager that works for him charges a $350 leasing fee and half of the first month’s rent. So that’s much higher than what Enterprise charges. And so fees can go all the way up to the first month’s rent depending on where you are in the country. So that’s definitely a cost that you have to consider. Let me make it very easy. I’m going to explain this very easily. One of the things that frustrates investors is that they think that the day that the lease is signed, that they’re going to get a check, right? Like, well, the lease is signed, so now I get $1,000, $1,500. The reality is the lease is signed, the leasing fee is charged, and there are other bills which have not yet been submitted to the company for payment, such as utilities. So the day that the lease is signed, it’s probably going to be an additional 30 days until a homeowner begins to see cash coming into their bank account. So that’s something that investors need to keep in mind. The vacancy period actually overlaps into the occupancy period, or the first month of the lease. I know it sounds complicated, but for investors you guys are planners you budget you think about the future your visionaries And you need to be considering that the cost of the vacancy is more than just the vacancy There are other costs that come along with that vacancy outside of it.
Richard
0:15:52 – So that original 60 days that we talked about Where should we inflate that to to be more realistic from when the next payment is going to land in my bank account?
Aaron
0:16:03 – That’s a really great question. I think you probably need to add an additional 30 days on top of that 60 days if you’re looking at the timing of the reoccupying of the property from a financial standpoint. So you need to tell yourself I’m going to be without cash for 90 days.
Richard
0:16:17 – Now does your re-leasing fee incorporate some of the costs that associated with rent ready or are those going to be fees that are charged to the owner in addition such as cleaning fees. We already talked about painting which almost always has to happen right sometimes there’s carpet cleaning.
Aaron
0:16:34 – The fees that we charge are administrative fees and so they aren’t the same as contractors fees. When you’ve hired us as a licensed realtor real estate brokerage property manager, we need to be compensated, you know, for the work that we do.
Richard
0:16:53 – So I should get your title ingrained on my brain, shouldn’t I? Property manager. You manage all the processes for me, but I pay for the processes.
Aaron
0:17:02 – That’s correct. I mean, we are relieving you of the obligation to do this administrative work, right? Right. And the administrative work, as we talked about, is not only ordering, but also supervising the make ready work that we’re doing and then it’s also administering and supervising the leasing effort and making sure that everything is documented properly, that your lease is legal, that it’s been signed and understood by the tenant as to what their responsibilities are and then in essence getting them started or onboarding them into the leasing process. So those are administrative fees.
Richard
0:17:36 – So to summarize where we are at this point, we’ve talked about some of the things that will need to happen to the property should you want to put in a new tenant. We’ve got painting, we approximated $2,800 for that. Utilities about $200 to $250. We’ve also talked about the leasing fee if you’re using property management company that could be around $600 or more. We’ve got a monthly fee for the property being vacant at $25 So the total that we’re running out for 60 days is $5,100 based on a $150,000 house Now let’s take into consideration the fact that you said we realistically until money lands. It’s going to be 90 days We’ve got to add 50% to that Richard.
Aaron
0:18:19 – You’re right. I mean in order to invest in and operate real estate you have to have cash This isn’t something that you can consistently finance with credit cards or lines of credit. You need to be building up your cash reserves and to be able to budget for these vacancies. It can be very expensive. I just remembered one of the things that I wanted to bring up before is painting always required? Should we assume that painting is always required? The answer to that question is yes. I would assume as a property owner that I’m going to have to come out of pocket $3,000 on average, sometimes $4,000 if I don’t have to do any major repairs for a make ready turn. You need to budget for that regardless. Now, if we do the move out inspection and the house is in good condition to where you don’t have to paint, don’t paint. Clean the house, clean the floors, make sure that it’s move in ready, but if you don’t have to paint, don’t paint, don’t just paint because it’s vacant. I wanna make sure that we say that. The other thing is, sometimes we do a move-out inspection and the house does have paint needs and paint is the number one expense that all investors will have to pay during a vacancy. So sometimes we go into a house and let’s say the paint wear on the walls is 50%. What that means is that if they had children, there aren’t hand marks on the walls. If they stayed there for two, three, four years longer than that initial one year stay, then there’s just going to be more life that was lived in that house and there’s going to be more wear on the walls. Homeowners have a decision to make when they have a two, three, or four year tenant move out. They need to decide, do I want to put the cash back into the paint to make the house look great so that I get maximum rent or Am I willing to accept less rent for what is a well-loved home? Right now rents are inflating like crazy the year that we’re recording this to 2024 we’re at a very high inflationary position things just cost more everything costs more and Rents have been a place where it has been, in my opinion, runaway inflation. I can’t believe how much certain houses and certain properties are getting in rent. A two-bedroom, one-bath condominium getting $1,700, $1,800 in rent in Memphis, Tennessee is unheard of. That is very expensive and it really is very exclusive because most people in our town would not rent a two-bedroom one-bath condominium for $1,700 a month. So we’ve got this bubble, we’ve got this sort of like layer of cash flow which investors could get if they wanted to invest the money into it or they could get a more reasonable rent with a well-loved home. So again it needs to be clean, it needs to be safe, it needs to be a good property for somebody else But you don’t always have to make it look a brand new every time. This is a major lesson investors I want you to know this for instance if a member of our staff comes to you and says okay This is the cost for the make ready and there’s a three thousand dollar paint charge in there Ask to see the pictures you get to evaluate this house for yourself because guess what it’s your house. You don’t need to always listen to what the property manager suggests because even though they want the best case scenario for you, there are plenty of medium case scenarios that you can adopt. One of our most successful investors always gets me on the phone, he has about 25 properties with us, and he’ll say where can we cut out the cost? And he has me, although I can’t do this every time, I can do it with certain investors, go through with a scalpel and mark through the items that we can walk away from. And then he has me call the contractor and attempt to negotiate a better price. So these are things that anybody can do all over the country with Werner Property, whether or not you have a professional manager. Negotiate, break it down, know what your house needs, or if you wanna do a full refresh, just know that it’s gonna cost you a lot of Money and do a full refresh you will eventually get your money back Richard That’s another very important point anything you do with real estate outside of a 08 style crash You will make back in real estate.
Richard
0:22:40 – So I mean based on everything we’ve said the astute listener will be figuring out where I’m going with all of this. So based on all these averages that we’ve talked about and the the potential money that you’re going to spend when you don’t have a tenant in your house. We’re at about $7,600 for that $150,000 house, which equates to approximately $600 a month over a 12-month period. So given that information, let’s talk about strategies for tenant retention. How would you go about negotiating rent carefully because if you were to replace your tenant you’re going to lose $600 a month during that process. So maintaining the rent at the same amount actually is a gain versus changing tenants.
Aaron
0:23:24 – Yes I think a very interesting direction that this conversation is going in is that I have some secrets for how to retain tenants that I don’t convey these are things that I’ve learned over more than two decades of working in this industry And so for the first time I’m going to be conveying some equations and some math that New investors don’t even think about.
Richard
0:23:53 – Well, in the words of the Red Hot Chili Peppers, “Give it away, give it away now!”
Aaron
0:23:55 – All right here. We go. It’s a great band So here’s an easy metric and and we’ll start with one and then we’ll move to others. The easiest central equation that you need to consider is how painful is it for the tenant to move from one property to another? Because there’s pain associated with moving. If you’ve got children, I have children, you have children, you gotta pack up those kids. You’ve got to disrupt their life. If you’re married, you’ve got to disrupt the life of your spouse. This day and age, if you, let’s say, moved into a house five years ago, well, guess what, guys? 2019, you got a great deal on your rent in comparison to 2024 rents, right? Just like the current situation with mortgage rates. All these people that got 2.75% on their mortgage, they’re never moving. They’re gonna keep that house forever. That’s become a generational wealth for them. A bunch of tenants out there don’t wanna move because the rent that they’re paying is awesome, or at least not painful. When that tenant moves from a house that they’ve been in for two, three, four years to a new house, they’ve got to think about the cost of moving, Richard. They’ve got to think about the disruption of their lives, the actual monetary, financial cost of moving. They’ve got to think about the deposit that they have to put down on their next house, or condominium, and that takes a lot. That is a huge ask of a tenant. So, here’s the math. How painful is it for the tenant to move? It’s probably going to be between three and $5,000 the cost for that tenant to move, if you include deposits, the increase in rent, all of that. Let’s go to $3,000. Let’s take that $3,000 and divide that by 12, and that comes to what? Richard, you’re a math genius. What is? 250. Oh, you are on. I cannot believe you got that. So it’s $250 per month of pain that you now know that the tenant could be experiencing. Am I gonna go raise that tenant’s rent by $250? Never. Would I raise it by $150? Yes. Listeners, there’s the answer. How much does it hurt the tenant to move? Well, they don’t want to move, so let’s come up with a rent increase, if not a flat renewal, like you were talking about before, if you need to increase rent, and I would advise every homeowner to increase rent every time, even if it’s $10, even if it’s $20, because the one time that you let the tenant stay, unless they are at the top of the market, the one time you let that tenant stay for the same rent, they will expect it again in the next year they feel like you owe them something.
Richard
0:26:29 – Yeah. We’re talking about the psychological factor aren’t we I mean if if a tenant that’s been a good tenant up to that point suddenly gets a major increase even though it might be cheaper to stay than to move they’re likely going to move to a higher rent anyway which is another thing that needs to factor in to the cost of moving. But some people will spite themselves. Psychologically, they don’t look at it logically, and they just think, oh, well, I’m gonna leave anyway. So your argument of going to 150 versus the 250, I think helps to soothe that psychological situation that some tenants will find themselves in.
Aaron
0:27:12 – Yeah, I agree. And, you know, I know we don’t like to talk about COVID anymore, but on the on the back end of COVID, COVID has really raised the value of real estate, like you and I were talking about before. Where is home? Where can I call home? And home is very important. It made us look at ourselves and think about what is it that I want to have when I come home. I think for a lot of people, it sort of shocked them into the realization that they don’t have a home. Right. So what did that do during the boom, we’re looking back on this now as a psychological experiment. COVID actually encouraged homeownership and encouraged people to say, I’ve got to have a place to land, I’ve got to have a place that’s mine or otherwise, I have no idea what’s going to happen next, I could get taken away from me.
Richard
0:27:59 – I think actually, you know, talking about rent increases, this would be a good opportunity just to talk generally about the legal situation of rent increases because I know in some states across the country there aren’t any limitations on how much you can increase rent. Others they’re very restricted in where you can only increase by this amount. What are the laws in Tennessee for your properties? What can they realistically do in terms of rent changes?
Aaron
0:28:20 – So there are no restrictions in in West Tennessee that I’m aware of when it comes to what we call straight rent or free market rent or just you know typical rent. This would be for people that are not accepting or do not need a government subsidy to help them pay their rent. Okay so and by the way that’s most people even in Memphis the percentages of people that accept that public subsidy is very low. I mean it could be less than 3% of our city. So if we’re talking about just regular rent, there are no restrictions. If we are talking about Section 8 rent, there are restrictions. And so I would have to be able to prove in a report that I submit to the Section 8 office, Housing and Urban Development office, that the rent increase that I’m looking to achieve can be supported by the market. In other words, I can’t just suddenly say that my house is worth a million dollars per month. I have to be able to prove to the government office that my house is indeed worth one million dollars a month. Right, like that’s insane. With Section 8 rentals, what we do is we go to the market, we find the comps that we’re looking for, we put that into the report, submit that to Housing and Urban Development, and then they go through their process and either approve it, or they will say, we can only approve this amount, and then that is the rent increase that we run with. And then, of course, there’s a third, we talked about regular rent, we talked about Section 8 rent, and then there’s the law of common sense. The law of common sense says, if you jack up the rent on somebody, they’re going to move. They may not move this next year, but they will eventually move. If you jack up the rent on somebody, like in a way that is not affordable to them, you don’t even know if they’re going to complete the entire lease term. We need to work together, tenants and homeowners and investors and government offices, we are all working together.
Richard
0:30:23 – So in the day-to-day practice of setting rents and increasing rents, it probably goes back to what you said originally. When you first buy the house and you’ve got a tenant already there, an existing contract, it’s at that point that you would look to move that tenant on and correct market rent.
Aaron
0:30:40 – Yes, there is going to be a point, and going all the way back to the beginning of our conversation, there’s going to be a point when you buy a house that you buy a property that has higher projected rents than what the current resident is able to afford. So that would be a situation from an investor standpoint where giving them a notice to vacate, this is different from eviction people, this is very different. The word eviction is thrown around as if it happens all day long and as if it is something that’s normal. It isn’t. Eviction is the last card you want to play with a tenant, all right? We are simply requesting respectfully that they vacate at the end of the lease, okay? So now that we’ve got that cleared up, that is a position that the investor can be in to where if they infuse value into the home, like we talked about before, they’re able to put it back out on the market for something close to the market rate and benefit from a cash flow perspective which will pay off that infusion of cash or that improvement of the property within two to three years. One little bit of wisdom here is not to go for the market rate. If Zillow tells you that your two bedroom, one bath condominium is worth $1,700 and this condominium is located in a city like Memphis which is very middle-class we are very middle-class that $1,700 is going to be affordable to only a small group of people which means that your vacancy period could be extended because you have a product that’s too expensive for the market now the market rent being created by an algorithm is very different from the market rate being created by the market. These are two different things. You’ve got a best case scenario with Zillow and then you have the real world and we operate in the real world. So having that property manager just does so much for a landlord to be able to say, okay, what can I really get for this home? Not what is the best case scenario.
Richard
0:32:46 – So getting back to really the focus topic of this particular episode, what are some effective strategies for keeping tenants happy while they’re leasing from you? Now obviously, prompt and responsive maintenance is important.
Aaron
0:33:04 – It is, and I think we would want to go ahead and encourage any listener who has real estate to stay on top of their maintenance. We have this one homeowner, I saw an email this morning, this one homeowner has five properties. He’s a very, very smart man. He’s got multiple degrees. He will not put money into his properties. Whether it’s maintenance that’s needed, like exterior siding, or in this case, there’s a woman with a bathtub that she can’t use. Thankfully, there are two bathrooms in her house, but she’s tired of having her kids or her guests use her bathroom. You’ve got to do the essential maintenance on a property. If they moved into a property that has a garbage disposal and that garbage disposal breaks and it’s not their fault, you need to pay for it because they rented a house with a garbage disposal. It’s the same thing with your air conditioning, with your water heater, with your roof. If these things break, it is the owner’s responsibility, hands down, to make those repairs and that will maintain that tenant satisfaction. If you want to lose a tenant, don’t perform essential maintenance. The tenant then has the right legally to issue us a notice that they are vacating and then they can leave. And if we pursue them, a judge is going to smack us really hard. We have to maintain these properties. All right, so maintenance, that’s a key one.
Richard
0:34:20 – So open lines of communication, obviously, is a very important factor.
Aaron
0:34:25 – I love that. That’s exactly where I was going to go. There are a number of automated management systems that are out there. There are property management companies here in Memphis that I am personally familiar with where the tenant cannot walk into an office. They are not able to see somebody face to face. They can’t get anybody on the phone or if they do get somebody on the phone, the person is obviously offshore, obviously, offshore does not understand the context of the job that they are doing, and so the tenant feels sort of lost at sea. Enterprise has an open office where tenants can walk into five days a week from 830 to 5. They can schedule an appointment. They can speak to us here, you know, in the States, and they can also speak to our remote team members who are offshore. We’ve personally trained everybody, and they know that if there’s ever a problem where the tenant is not getting their needs addressed that they can reach out to us personally and have those handled. We care about our reputation. If your current property manager has got a terrible score on let’s say Google, when you read the reviews you can see that the property manager has not done the basics of communicating with their tenants, of maintaining the property, of being available just to talk to their tenants and you see a low score because of that and that’s your property manager you may need to go somewhere else. So in what ways do you think that you can improve tenant retention through flexibility? I mean are there times that you have tenants approach you saying can I do this to the house or can I do that? Is there a way in which scenarios like that can really foster good relationship? Absolutely you know most tenants have enough time and money to move into your property live there Live their lives there. Enjoy the property and leave that’s most tenants Flexibility for that type of tenant for the majority would be flexibility on the back end of the lease Okay, for instance over the years. I’ve had several tenants that said I can’t renew the lease I’m happy to pay an increase on the rent, but I can’t move right now and I don’t know when I’m going to move. Right? I just don’t know. Homeowners that are responsive to that and are flexible to say, hey, I don’t need the lease to be renewed for another year. I’d like for it to be six months. Can you do six months? If the tenant says no to that, I can do month to month. And the homeowner is flexible in that way. That tenant may often stay for years, month to month. It’s crazy. And they just don’t want to enter into a new lease term. If you’ve got a good thing going, don’t interrupt it.
Richard
0:37:00 – What are some things that landlords and property managers can forecast and mitigate the risks with tenant turnover?
Aaron
0:37:08 – Inspections come to mind. If your property manager has got an inspection program, even if it’s an annual inspection program, I would pay very close attention to the findings of those individual inspections. Enterprise offers as many as four inspections per year. We’ve always said that we think that’s too many. You know, I don’t think that tenants need to be monitored every 90 days, but certain homeowners see the value in that. We recommend at least two inspections a year, if not three, and during the course of those inspections, we’re going to take between 50 and 70 pictures of every house. So to the investor, if you want to mitigate those costs or at least prepare yourself for the vacancy costs, you need to pay attention to how the tenant is living in the house. If the tenant is living very hard in the house, holes in the walls, a hole in a door here or there. In lower income houses, we often see doors and door frames as being damaged or if there’s pet damage in the property, the way to mitigate that is to inform the tenant, hey, you’ve been rough on my house. You know, you need to clean these items up and we’re gonna be back to inspect the house within 90 or 120 days, and we wanna see these items handled. If you send that notice in writing and the tenant doesn’t handle those items, guess what? You can get them out as soon as you want. You can even get them out because you’re noticing that damage. What the law requires in Tennessee though is that you give them an opportunity to cure the problem. If they don’t cure the problem, you can kick them out.
Richard
0:38:36 – Off the top of your head, can you think of any situations that you’ve had with tenants where there has been a problem that you’ve been able to rectify over the course of time and they’ve gone on to be a consistent and continued tenant?
Aaron
0:38:51 – We had a tenant who has emotional support animals.
Richard
0:38:55 – Right.
Aaron
0:38:56 – Right, which is a, that is probably one of the hottest button topics out there right now, nationally. What do I do? Are they allowed? Can I say that they’re not allowed? Can I charge a deposit for it? Where’s the letter from the medical professional stating that this person needs to have an emotional support animal. I am not anti-ESAs, we call them ESAs, not opposed to them, but they are very, very complicated. Well, we had this one tenant who had two huskies and one of them was a registered emotional support animal and one of them was the companion pet to the emotional support animal. So, after interacting with our attorney, her attorney, and her medical professional, it was determined that the one emotional support animal could be kept inside, but that the other one had to be kept outside, and that we could ask for a deposit on the non-emotional support animal. So that was great. There was damage on the inside of the house, and we told the tenant, you’ve got to repair these floor damages. You have to repair these dog chews on the windowsill in order for you to stay. And we did not discriminate against her for having an emotional support animal. She did exactly what we asked. She put in new flooring, which was very impressive, and she upgraded the containment, the fence in the backyard, so that the other dog could stay outside. So I would say that that that was a situation that could have gone very badly for her and it would have been very complicated for us to pursue this in court. So by doing the right thing and saying, hey we want to help you but you got to help us, we were able to work it out through that flexibility that you were referring to before.
Richard
0:40:46 – So then in conclusion just to wrap up this episode, what would you say that your proportion of multi-year tenancies looks like? Do you find that you have many people that continue to renew?
Aaron
0:40:57 – Yes, I would say that over 70% of our tenants renew for one year. I don’t have an exact statistic. So 70% renew for more than one year and then a little less than 50% will renew into their third term. Enterprise property management has a significant rate of lease renewal. So our tenants want to stay, we want to work with them, we don’t want to beat them down with rents that are too expensive and we want to be here when they have problems so that we can help resolve them. We truly consider it to be a working relationship.
Richard
0:41:30 – So investors that are out there that want to further this conversation with you, how can they get in touch?
Aaron
0:41:36 – So you can always reach me by calling 901-671-1015. Or you can email us from PropertyManagementMemphis.com and we love that website. PropertyManagementmMmphis.com has been recently updated and made even more functional and informative than it ever has been. So if you have not yet been to our property management service website for investors and homeowners, and even people that are just interested in getting an education about how the investment real estate process works, you can visit us at PropertyManagementMemphis.com.
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