Vacancy on Rental Properties
Q. I’m considering buying a rental property, but am concerned about the vacancy rate in my area in North Las Vegas. The newspapers say it is decreasing, from more than 12 percent a couple of years ago to around 8 percent today. I’m still a little wary because that could be a full month’s rent and a big chunk of my estimated profits. Any advice on this? Mark M., Las Vegas
A. Vacancy is a tricky one, especially with single unit properties like homes, condominiums and town homes. Regardless of what the newspapers and local surveys show about the vacancy percentage, the most important items for single unit owners to keep vacancy low is by making their property very attractive to prospective tenants, aggressively advertising, showing the property to those potential tenants and treating tenants with respect.
Here are some things to avoid with a rental property:
1. Asking too much rent compared to the market rental rate;
2. Not updating your rental unit with newer fixtures, appliances, flooring or paint;
3. Showing the unit with dirty carpets and showing it when it is a mess;
4. Not adequately advertising, quickly responding to and quickly showing the property to good prospective tenants;
5. Not treating tenants well and with respect while they are renters;
6. Raising the rent significantly on tenants;
7. Failing to do the hard work, research and credit/prior rental/employment checks to qualify good tenants.
Avoiding those items will help you keep your tenants longer and happier. Lower vacancy also means you will make more money with less hassle than most landlords.
Note that all things you do to keep vacancy low are hard work, time consuming and can be expensive. But they should be a lot less work and less expensive than frequent tenant turnover and/or unhappy tenants.
If you don’t think you can do a good job and you are not committed to being a good landlord, you’re probably better off skipping on this opportunity. Good luck!
Q. A friend of mine is asking me to invest some money in a land purchase to hold for a few years and then sell to a developer. It’s about one-third the price that it last sold for in 2006, so it seems like a pretty good deal. What rate of return do land deals usually provide? Mary H., Rockville, Md.
A. On average, land deals provide negative returns to individual investors. Land is not a lower-risk investment. Land is pure speculation for most individual investors and it’s almost like going to Las Vegas and playing roulette.
The value of land, and future estimated future value of land, is wholly determined by what can be built on the property and how much you can sell the finished project for, less the cost to hold and cost to build the property. This valuation model is called Residual Land Valuation and it’s pretty complicated to calculate with any certainty. Even the best RLV analysts still make some very large assumptions in their valuations and many times they can be very wrong in those calculations.
A non-builder buyer, like yourself, has little ability to make a good, informed decision on whether or not the property will go up in value. Plus you don’t get any rental income or profits from land. It is all negative cash flows paying taxes, insurance and maybe a mortgage.
So if you want to buy land, you’re really taking an extreme risk that the price will rise significantly to earn you a fair rate of return. You’ll get better odds in Vegas – and have a lot more fun too!
Lastly, what a property sold for a few years ago is wholly irrelevant to what it is worth today. Don’t consider past values when making investment decisions for the future.
EDITOR'S NOTE: This story was written by Leonard Baron, MBA, who is America’s Real Estate Professor® His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com