How Can Teamwork Deliver $100K+ to Struggling Rental Investors? Our December to Remember

2023 was a generally slow year for the rental market. There were spurts of strong activity punctuated by long periods with little traffic at all. Basically, unless you were cutting the price dramatically, you had a few small windows of time to act fast to fill a home before that wave’s crest had passed.

We see a minor form of this every year as shown in this seasonal chart from Apartmentlist.com.

Apartmentlist.com graph of monthly rental market activity fluctuations

Note this chart shows search intent, so website traffic in January and February is typically planning for a spring move. They are the slowest months for our company.

This year was more proncounced than most in just how slow the valleys were. The fall bounce that we’re used to seeing came later than we’ve seen in our 20 year history. As Thanksgiving came around after several slow months in a row, we had a worrisome number of homes that had already been on the market longer than we have ever seen. That is not the strategy we would have chosen as we consider vacant homes to be risky and costly.

That’s due to another trend in 2023 which is how difficult it was to convince owners to reduce their top-line rental rates, versus throwing money away on unproductive vacancy costs.

There are probably a lot of reasons why rental investors opt to pay $100 a day (a common cost of vacancy in our markets) versus reducing the rent $100 a month. In effect betting big on the bird in the bush, rather than the one in the hand. The root causes are poabbly best left for psychologists, but we’ve heard a lot of mistaken assumptions like.

A lower rent will attract lower quality tenants : Great residents by definition have great finances and make smart money decisions. The exact opposite is true, high credit quality bets get low interest rates and costs, and risky ones pay a premium. The single best method to secure a high quality resident is to offer a competitive price. There is stark data regarding how much more profitable high-quality residents are over the long term.
It’s cheaper to let the home sit empty than take a rate I don’t agree with : That’s almost always not only false, but a classic and effective way to dramatically decrease your long term net income. Bottom line. We tie our pride to bottom line results, not top line. If you get a top dollar rental rate but sat empty for one-third of a year as many landlords do, is that something to be proud of? If we rented in one month (8% of a year) for $300 per month less, your net income is likely dramatically higher in the first year. We also likely secured one of those high-quality residents who are good at finding value, and with our resident satisfaction model they are likely to stay in place, loyally paying thousands of dollars month after month while taking exceptional care of your asset. That’s a win win model, not a biased one. Let’s put our pride aside. Costs these days are large and relentless, you need income to be also. A vacant home combined with an inflationary environment and a rental market in clear decline is a recipe for major disaster. Again, mistime your price strategy and you could easily be waiting for the next seasonal increase months from now. Furthermore, vacant homes actually have more major maintenance problems than homes occupied with a high quality tenant. When AC’s and water heaters are underutilized, they are dramaticlaly more likely to fail during a move in, especially if that’s in extreme weather. We do the vast majority of our mainteance at move in, and for most of our homes very little after that.
Ill just wait for a better market – That of course is not really an explanation, but probably stems from the fact that pride plays a large role (almost always to our detriment) in setting a top line rental rate. Many owners copletely fail to account for vacancy cost, or the cost of a lower quality resident likely to pay that rental premium you’ve been holding out for. Just as low quality borrowers will pay higher interest rates for any loan they might seek. As with payday lenders though, you had better know what you’re doing if you are going to play that game. Furthermore, the biggest issue wiht this approach is that the market usually does not come around in time. In the end these owners almost always end up paying 2-3 months for vaancy (close to $6K wasted in most of our markets), and then reducing the rent 10+% anyways. The ultimate lose lose outcome and it shows up dramatically on their long term investment performance.

prioritize income and costs properly for great rental results

Professional managers accept vacancy cost in some situations. Knowledge of when these situations makes sense is not standard in the industry, and is hard to take advantage of if you aren’t in the trenches day after day.

For example, as we write this article in late Februrary 2024 we’re beginning to enter a period where it may make more sense to “wait for a better market” though it’s still extremely risky. Given that things have been slow, we’re worried that it might be late Apri before the market really rebounds. Perhaps mid May before prices have seriously increased. So that strategy could still easily end up with 2.5 months of vacancy (thousands in even cheap markets) and a price that is only slightly higher than where we currently stand.

In those instances we often sign a 14-16 month lease to ensure that we don’t have so many seasonal challenges in the future. Some owners further latch on to this decision as a concern beause “won’t I get a winter rate for longer now?” Yes you would but you are missing the point. Vacancy is the enemy here, not a slightly below market rate if that also translates into a higher quality resident. What you give up on the top line rate you more than make up with a higher quality resident whos statisically likely to lead to less of every problem except job transfers.

Repair cost
Vacancy cost due to broken leases and delays on rerents due to poor housekeeping
Eviction and non payment
General difficulties like lashing out at standard rules
High-quality renters who have buy now credit quality do tend to move more often but with much less vacancy and turnover cost in between it’s less of a challenge when they do

High-quality renters who have buy now credit quality do tend to move more often but with much less vacancy and turnover cost in between it’s less of a challenge when they do.

Why do low credit quality residents move less often? Becuase it’s extremely expensive. They tend to lose dozens of application fees before approval and the overall process is a nightmare. So they tend to stay put for much longer periods of time, leading to much larger and stressful turnovers even if they do take better than average care of the home.

This was the backdrop our company faced when we came back from Thanksgiving. We had approximately 30 vacant homes on the market, and almost no traffic.

We had been telling our owners for a month that we expected to see a bump in traffic any day, and even advised many of them to hold off on reductions until we saw a general pickup.

That’s a common strategy for us. We hold our price reductions if we can, until we feel a general upsurge across all of our homes in a given market. A small price reduction timed well, can all but assure that a home will be filled soon.

Often landlords trade vacancy cost for higher revenue

Upon our return, the market was still showing no signs of life, and our company started moving into red alert mode.

Our leadership team met to discuss the challenges we faced, and what might be done to improve on them. They ran some numbers and came to the realization that if we didn’t clear our inventory soon it would cost our owners over $45,000 just for the month of December. Add to that the fact that January and February are the slowest months of the year, and we felt we were staring down the barrel of almost $120,000 in vacancy cost, the most egrigious form of waste in our industry. Winter is also a terrible time to have a vacant home.

We then enacted fhe following strategy.

Get operations to each vacant home and assess if repair and update issues are going to cause us problems we can’t overcome at the current price.
Get with owners to quickly and efficiently quote and secure approvals for those jobs, then use our new operations division to complete them extremely quickly at a great value (helps to get fast approvals)
Once spruced up send our best photographer out to re-shoot all photos for vacant homes to the highest standard we could provide.
Update the listings from top to bottom, not just the photos but the photo we used in the first place position, descriptions, added general area photos.
We also put in the small price reductions we had been withholding.
Run signficant social ads for each vacant home, with the aggreage effect being that each property drove traffic to our site, and to all our other properties.

We always run social ads, so that alone wouldn’t have moved the needle much, even though we did fire off almost 20% of our entire years marketing budget during those three busy weeks between Thanksgiving and Christmas.

Our undeniable urgency and effort at this point was clear to the owners who had been holding out, and our messeging began to catch traction. With their increased confidence in our effort and advice, combined with their own concerns about winter vacancy we secured the needed deductions.

What happened from there was pure magic for a property management nerd.

Our operations division had mostly focused on building their division since it was only a few months old. At this point they shifted their focus to providing any and all support they possibly could to our account managers, to ensure they could stay firmly placed at their battlestations directing the flow of traffic both for the huge amount of home viewers we were lininig up, and our field staff themselves who were in need of disptach / admin services while they were zipping all over town.

Also, up to that point our account managers had been quite skeptical of their new operations counterparts. Probably due to human nature and worries that change might leave you disadvantaged, our account managers had not been taking advantage of the help we were trying to provide. Sensing that, the operations division simply doubled down on providing them hard to decline support.

This shift began to reverse months of individual do it all myself mentality. Finally we saw our account managers leaning heavily on operations because alone they would not be able to handle the dramatically increased load this overall strategy produced. Their increased engagement seemed to focus our inexperienced operations hires directly on their needs, which of course are almost identical to the needs of our customers, especialyl those shouldering vacant homes during this period.

Our property management company is built to run like a team

For a company that was modeled on sports teams, talks teamwork constantly, and built a system that required significant amounts of collaboration in an industry not known for it at all, this was a magical moment.

Obviously the goal was always to rent those homes at any cost, but the fact that it finally brought together the beneftis of collaboration between a division focused on customer and financial results, and one focused on efficiency and exectuting tough tasks quickly and effectively was a long term sign of amazing things just ahead.

Of course we knew that the only effective method to surmount the challenges we faced was through committed teamwork, so our goal had largely been achieved at that point.

From there it was mostly a matter of watching the results of a magic collaborative process roll in and fall into place, and that’s exactly what happened.

By the time Christmas arrived we had rented almost every one of our vacant struggling homes that had been languishing on the market. Most importantly, to extremely high quality residents who often timed their move specifically to find a value. As we write this in late February 2024 we estimate we earned $100,000-$150,000 in rent income that our competitors would not have, that otherwise would have been wasted with no benefit to our owners or residents.

That’s the power of great management.