SS237: What Is the Cost of Tenant Turnover

SS237: What Is the Cost of Tenant Turnover

Tenant turnover is one of the most expensive and often underestimated costs in rental property management. In this episode, Charles Carillo explains how a single tenant moving out can cost landlords over $5,000—before any renovations even begin. He breaks down the components of this hidden expense, including vacancy losses, make-ready costs, and unpaid rent balances. You’ll also learn practical strategies to reduce turnover, retain good tenants, and protect your rental income. Whether you’re a new landlord or an experienced investor, this episode offers essential insights to strengthen your cash flow and improve your property’s long-term performance.

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Talking Points:

  • In any business you are in, there are going to be Key Performance Indicators (KPIs) that you are going to consistently track to see how you are doing. Like most rental investors, when I began, I was trying to have the rent that tenants were paying cover my expenses. Still, over the years, we started to track some key metrics that we have recognized as having a significant effect on our net operating income. One of these is the turnover rate. 
  • However, before we delve into the turnover rate, let’s discuss vacancy. This is one thing that truly drives me crazy when speaking to investors or brokers who gloss over this metric. When I look at a 10-unit C-class property for sale, and the owner or broker puts in a 5% vacancy rate in the proforma. In other words, you’re telling me that over a year, with 120 months of possible rent collection (10 units x 12 months), you’re going to collect 114 months or have only 6 months lost to vacancy. That couldn’t be further from the truth, even if rents are dramatically under market. Even when we purchase 100+ unit buildings, with on-site management and leasing, we don’t pencil a 5% vacancy rate until the property is fully stabilized, and sometimes that is 6% or 7% if we are tightening our tenant screening. With that being said, reducing vacancy is crucial for increasing revenue.
  • To calculate the turnover rate, you take the entire year’s number of average occupied units, divide that by the total number of move-outs, and then multiply by 100. I have seen some people calculate it by the total units, not the average occupied units, but that shows a more collective vacancy and turnover rate, rather than an actual turnover rate. The industry average turnover rate is around 40%-50%, so anything under 40% is considered great. I would try to improve annually rather than focusing on some generic industry statistic.
  • Currently, the cost of turnover for an average B-class property is just over $5,000. And that includes: rent loss, vacancy, unpaid balances, turn and make-ready expenses. If you are doing a more in-depth renovation, you can add those additional expenses on top of the $5,000. Still, hopefully, in that scenario, the rent premium will be higher to justify the extra cost.
  • How do property managers reduce tenant turnover?
    • 1. Negotiate rent renewal increases with residents.
    • 2. Keep open lines of communication with residents who give notice to understand their issues and address their concerns. This includes addressing solvable issues to encourage these tenants to stay and contact the tenant within hours if they give notice to move out, not days or weeks.
    • 3. Consider offering concessions to retain residents, possibly unit updates. For example, a tenant has an older refrigerator that has required multiple visits from your handyman; maybe give them a new one if they sign for another year.
    • 4. Reach out to tenants months before a lease ends to get them to renew before they even have a chance to shop around. Even if you get them to stay with a $500 appliance update, it is a fraction of what it will cost you if they move out. I also prefer raising the rent, even if it’s just 1% or 2%, so I would rather raise the rent and offer an update than have no increase at all.
  • Managing vacancy and tenant turnover is something that every landlord can do, no matter the size of their portfolio or their financial resources. Minimizing both is key to increasing your property’s net operating income and is especially important if you plan on selling or refinancing your property in the next 2-3 years.

Transcript:

Charles:
What if one tenant moving out could cost you over $5,000 even before renovation starts? And here’s the thing, this isn’t just theory. We tracked turnover costs across hundreds of rental units. And the real cost isn’t just in vacancy. It’s all the funds you need to come up with to prepare the unit for the next tenant and get it rented. In other words, tenant turnover is silently killing your cash flow. Welcome to Strategy Saturday, I’m Charles Carillo, and today we’re breaking down one of the most overlooked expenses in real estate, the true cost of tenant turnover and what you can do to manage it. So let’s get started by breaking down what we’ve realized about keeping tenants, reducing turnover costs and improving your properties bottom line without spending more money. So in any business you are in, there are gonna be some key performance indicators, some KPIs, they’re going to be consistently tracked to see how you’re doing.

Charles:
Like most rental investors, when I began, I was just trying to have the rent that tenants were paying me cover my expenses, and I was happy with that investment. So over the years, we’ve gotten a little bit more analytical and we started to track some key metrics that we have recognized as having a significant effect on our net operating income. One of these is the turnover rate. However, before we delve into turnover rate, let’s discuss vacancy. This is one thing that truly drives me crazy when speaking to investors or brokers who gloss over this metric. And when I look at a 10 unit C class apartment, property for sale and the owner or broker puts in a 5% vacancy rate, ’cause that’s kind of like a standard in the proforma. In other words, you are telling me that over a year with 120 months of possible rent collection, 10 units, by 12 months, you are going to collect 114 months or have only six months lost to vacancy.

Charles:
That couldn’t be further from the truth, even if rents are dramatically under market, and even when we purchase a hundred plus unit buildings with onsite management and leasing, we don’t pencil a 5% vacancy rate until the property is fully stabilized and sometimes that is 6% or 7% if we start tightening our tenant screening. With that being said, reducing vacancy is crucial for increasing revenue. Now, to calculate the turnover rate, you take the entire year’s number of average occupied units, divide that by the number of move outs and then multiply by a hundred. So what that means is that you have a hundred average occupied units and then you say you add 50 move outs, and now you have a 50% turnover rate. Now, I’ve seen some people calculate it by the total units, not the average occupied units, but that shows a more collective vacancy and turnover rate, which rather than an actual turnover rate where we want really an actual turnover rate, there’s not a problem having vacancy at a property.

Charles:
Vacancy’s. One thing, you’re not getting rent off that, but turnover’s really costing you money. And the industry average turnover rate is around 40 to 50%. So anything under 40% is considered great, and I would try to improve annually rather than focusing on some generic industry statistic. ’cause Every market is so different. It’s one of those things where you just want to improve next year, and if you’re improved since last year, you’re doing well. Currently the cost of turnover of an average B class property is just over $5,000. I think for us it’s like 52, 5300, and that includes a rent loss, a vacancy, unpaid balances, and turn and make ready expenses. Okay? There’s a lot of parts to a turnover, and if you’re doing a more in-depth renovation, you can add those additional expenses on top of the $5,000. Still, hopefully in that scenario, the rent premium will be higher to justify the extra cost.

Charles:
So for example, you have the $5,000 I just told you have another $5,000 you’re putting in for renovations, but hopefully you’re doing this because you’re gonna get an extra 200 or $300 a month in rent. So that’s gonna justify the extra costs. So how do property managers reduce tenant turnover? Number one, negotiate rent renewal increases with residents. Number two, keep open lines of communication with residents who give notice to understand their issues and address their concerns. And this includes addressing solvable issues to encourage these tenants to stay and contact the tenant within hours if they give notice to move out, not days or weeks. There’s several times that I’ve rented from professional managers and it’s one of those things where you give your notice and you don’t hear from anybody. They don’t wanna keep you, they don’t care about it. It’s just business is normal and that couldn’t be worse.

Charles:
Property management, it’s one of those things where you have to speak to the tenant and you have to find out why they’re moving and you have to try to see if they’ll stay. Sometimes they’re moving for work, whatever, they can’t stay understood that, but for other times, this isn’t working, this is a problem. And then when you figure out how much that’s gonna cost to fix it, it becomes easier to fix it and try to get them to stay before they’re already moving out and negotiating. Rent renewal increases with residents. Going back to step one, that’s gonna be one of those things is when you tell them this is where the rent’s going. If you stay and have your number in there and have how they can contact you, that’s gonna be one of those things where they’re gonna be able to go back to and go, I can’t pay this, but I can pay this.

Charles:
And then the negotiating starts there, but you also get to keep ’em. You’re gonna get more money for next rent, even if it’s not at market rent. Number three is considering offering concessions to retain tenants, possibly unit updates. Now, for example, a tenant has an older refrigerator that has required multiple visits, or like an ice maker that hasn’t worked from your handyman. Maybe give them a new fridge. If they sign for another year, that’s gonna be a fraction of what it’s gonna cost a turnover. This person already has good credit with you, in other words, because they’ve already paid rent for a year or so, you know, they don’t make any trouble. They’re still there. They’re still tenants of yours. So just giving them several hundred dollars of something, but also it’s also adding the value to your property when you have a new fridge in there.

Charles:
Now that’s for you. You know, I’m not gonna have any issues with that appliance for 10 years. I don’t have to have any more calls there. I don’t have to waste sending my handyman there and paying ’em 40 bucks an hour. So there’s all this underlying benefits that maybe a landlord doesn’t see that comes along with updating their units and also we’re gonna keep them from leaving. Number four is reach out to tenants a months before a lease ends to get them to renew before they even have a chance to shop around. You want to be there before they start looking on realtor or Zillow or something like that to start renting. Even if you get them to stay with a 500 appliance, a thousand appliance, it’s a fraction, like we said, of what’ll cost you if they move out. And I also prefer raising rent, even if it’s 1% or 2%.

Charles:
So I’d rather raise the rent and offer an update than have no increase in all. And you’re just like, give them appliance this way. It sets with them that my rent’s gonna go up every year here, but they’re gonna work with me in fixing and updating the unit as it happens. Managing vacancy and 10 turnover is something that every landlord can do no matter the size of their portfolio or their financial resources. Minimizing both is key to increasing your property’s net operating income. And it’s especially important if you plan on selling or refinancing your property in the next two to three years because keeping people in your units, it’s gonna keep your NOI high, which is gonna get your value high, which is gonna make it easier for both of those events to happen. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments, potential show topics at globalinvestorspodcast.com.

Charles:
If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

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