One of the more critical components to achieving the highest level of return on investment from a rental property is avoiding high tenant turnover. Every time a tenant moves out of your investment property, you, the landlord, have to put money back into the place. It could require a fresh coat of paint, new drywall, other minor fixes from standard wear and tear, and general advertising costs to rent it again. In some unfortunate circumstances, you may have to address much more substantial issues due to abuse of the property.
So the question is, how does a landlord avoid high tenant turnover?
There are many factors which cause tenants to move out, but the two I want to address today are pricing and demographics.
The price point charged on your rental property is naturally going to dictate, over the long-term, the level of turnover you experience with tenants. If you charge too much for your rental, it is only a matter of time until your tenant realizes they paid too much for your pad and start to look for a new dwelling. Just give a fair price and avoid that. Don’t be greedy. Read my article “How Much Can Your Tenant Afford in Monthly Rent.”
The other component, which is the chief issue I want to address today, because it recently came up for a property I manage, concerns luxury properties, and what’s called “upward mobility”…
While luxury properties can be lucrative as executive rentals, and in a rising market they often appreciate faster than most, they also attract tenants with instant upward mobility. By that I mean, if you’re charging a tenant $5,000 per month to rent your luxury townhouse, that person has the means to buy a place of their own, virtually at any moment.
When they get the itch to buy their own pad, the tenant is gone once the lease is up. Saving for a new home over a long period often isn’t required in this demographic. They can move quick.
A tenant’s upward mobility is an important thing to consider from a landlord perspective, especially if you’re contemplating entering the high-end rental market as an investor. While it may be prestigious to own what real estate investors call their ‘trophy property’ (luxury property with a coveted address), there are added variables/risks in that marketplace, often resulting in higher turnover of tenants, which adds costs and cuts into cash flow.
If your tenant can comfortably pay rent of $3,000 per month, and in that same neighborhood with a 20% downpayment they can get a mortgage for $2,200, it’s only a short matter of time before they take the plunge and become homeowners.
It isn’t to say that as a landlord you’re targeting people who can never afford to be homeowners. My previous writings have explained that as landlords we serve a critical role in the homeownership process and often provide part of the bridge for people to get there. What I’m saying is, when you get into that luxury market you’re running the risk of high tenant turnover, which means your cash flow will likely lessen. Your tenants can afford, almost whenever they so choose, to buy their own place. They know this.
The tenant wins, and you (the landlord) win, when you can fill a void in the marketplace by offering a significantly cheaper rental rate than it would cost the tenant to own (calculating in property tax, insurance, mortgage, etc.). That’s why many of the most successful property investors/landlords pursue multi-family dwellings. They provide the opportunity to rent in that sweet spot price point.
Always be aware of the upward mobility of your tenants. The rental rate you charge needs to make sense for both parties. When it does, your tenant turnover rate decreases dramatically.
PS As a landlord, investor and property manager, I’ve learned a thing or two about rental properties over the last decade in the business. Subscribe to my newsletter below. Only my best content will land in your inbox.