What is Turnover Expense?
Basically, it is the cost landlords incur during the period when one tenant moves out, post- and pre-tenancy work is done, and the new tenant moves in. Knowing how to calculate turnover expense helps you to plan a long way ahead. Simple economics says that the higher the turnover rate in any given period (e.g. one year, two years, five years) the higher the overall turnover expense will be.
In addition, there are specific factors that can reduce or increase turnover expense.
What May Be Included in Turnover Expense?
Basic Turnover Expenses
- Deep cleaning the property, so it is attractive to potential tenants.
- General maintenance work on fixtures and fittings, paint touch-up, etc.
- Marketing the property to find a new tenant.
- Interviewing potential tenants.
- Carrying out all the credit and other checks on potential tenants.
- Drawing up the new lease agreement.
Other Turnover Expenses
- Delayed maintenance work. This may be a big job that the previous tenant did not want to have done while they lived there, but should be done before a new tenant moves in. E.g. roof repair, replacing the A/C or furnace units, refurbishing the kitchen or bathroom, repainting walls.
- Unexpected repairs and maintenance. These could be normal wear and tear not reported, or accidental or intentional damage caused during the move-out.
- Optional upgrades to add market value and to enable higher rent to be charged.
- Eviction and other legal expenses.
How to Calculate Turnover Expenses
Turnover expenses boil down to three main factors. Landlords who plan ahead, who specifically choose their rental market and take such expenses into account, can keep them as low as possible.
Factor #1: Age and condition of the property. Older and lower quality properties may be purchased for less money, but, without improvements being done, a landlord will only be able to charge a lower rent, may find the tenants are unhappy and move out sooner than expected resulting in loss of rental income.
Factor #2: The chosen market. Every rental property competes with comparable properties in comparable areas for tenants. Short-term and long-term rental markets have their own market forces.
Factor #3: Choosing tenants wisely. Some tenants will be perfect, others may cause damage, fail to pay their rent on time, or disturb the neighborhood.
The Bottom Line
The longer an ideal tenant stays, the lower the turnover expenses. Taking potential turnover expenses into account before buying an investment property will help to keep them at a minimum. Choosing repair and replacement items which are “good enough” to attract the right new tenants will also keep turnover expenses down. A landlord who is fully hands-on should use the factors listed above to plan ahead to maximize their profit. The alternative is to use a well-respected management company which has:
- A supply of good potential tenants on their books.
- Work with real estate lawyers to ensure landlord-positive leases are drawn up.
- Work with contractors to handle maintenance, repair and refurbishment jobs quickly and less expensively.