Rental season is real and improves rental performance

As the weather gets cooler, and indoors cozier, people typically opt to hunker down and hibernate. Optional moves are rarely on their to-do list during the hustle and bustle of the holiday season, and the overall general chill of winter. Factor in potential winter storms which tend to shut down cities in the south, and moving is often not an option at all. In 2014 for example (snowmageddon as the media dubbed it) most of January and a good bit of February were almost completely shut down.
Mid to late December through March are always the slowest possible time of year to get a property rented. Even if someone is moving because of a job transfer, those usually happen before the end of the year, and we do tend to see a last-minute traffic bump in early December.

The problem homeowners face is little demand, and a lot of supply. Properties that were overpriced in fall begin to stack up, and for whatever reason, a lot of homeowners list their homes for the first time around the turn of the year.

If you overprice your rental late in the year, you run the risk of the property sitting vacant and losing money daily, for long periods (see our upcoming post on the hidden costs of vacant rentals). We usually advise to systematically and unemotionally reduce rental rates during peak seasons, but in the winter it’s quite common to have such weak demand, that even significant reductions don’t have much effect.

The systematic reduction strategy is not as effective during the winter months. If you keep reducing during times of heavy supply and little demand, you could end with an extremely low rate. We’ve even occasionally pulled rentals off the market for a couple of weeks if we’ve cut the rate dramatically, and we start to sense an overall increase in activity across all our homes. For this reason, during the winter we tend to operate much more by instinct when it comes to weighing the pros and cons of vacancy versus rental rate. We always say pricing a rental is an art not a science, but it’s especially true in slow times. The fact that we manage such a wide range of properties gives us a unique advantage when it comes to gauging the overall market health at a given time period, and often our decisions for reductions come primarily from our overall response, not just the response on a single property.

So, how does a homeowner combat the frozen rental market? We have a few useful strategies we often employ. Which option fits best depends on the goals the owner wants to achieve, and we usually step up communication at this time. Our most common approach is to list the home relatively close to a rate we feel has decent odds of quickly attracting a good tenant, and hoping to go the more traditional route. That said, during these periods we almost always require 16-month leases to ensure that we don’t end up in the same predicament a year later, but instead start working our way toward a consistent summer schedule. If however at that time we find anemic demand, we often recommend lowering the rate until filled, and committing to a shorter-term lease. This will limit vacancy, which will also dramatically increase your net income. In our opinion, when faced with the tough decision of limiting vacancy or taking a lower rate, limiting vacancy should almost always be the top priority (very cheap monthly rates would be the main exception).

Most homeowners do not like the sound of shorter-term leases, and rest assured during 80% of the year we don’t either. However, it can have significant benefits during the challenging 20%.

In addition, any placement expenses our company may charge are prorated should we opt for a shorter term, so we share in the seasonal concessions.

A six-month lease at a lower rate is more beneficial for several reasons. You have a tenant in an otherwise vacant home (see our upcoming post on the hidden cost of vacancy), which is particularly helpful in winter to reduce the risk of frozen pipes. You’re not locked into a lower rate for an entire year, meaning you can raise the rent after the six months, and the average rate for the entire year typically comes much closer to what’s desired. This timing also puts homeowners back on the summer schedule, where rates are typically much higher, and vacancy much less.

When opting for lower rent and shorter leases, always be upfront with the tenant. Let them know that after six months, the rate will increase. For shorter lease tenants, we advise that we are more strict on cleaning and paint charges. We recommend no wall hangings, few blemishes on the paint, and an expectation to have the home returned in nearly exact condition to the start of their term. This will reduce turnover time and owner costs for any cleaning or painting that will occur when peak rental season comes again.

Another strategy we use for dealing with winter rentals, is advising owners not to make larger investments during this time frame (unless they’re so large it takes the property off market for a couple months), and for properties that aren’t in the best of shape, be slightly more accommodative of marginal quality tenants & pets. This also may be very concerning, but let’s consider the positive aspects. Since we’ll likely opt for a shorter term and lower rate, fundamentally your return on investment for painting, replacing carpet, and other short-term repairs takes a big hit, less bang for your buck.

For this reason, it usually makes much more sense to take what we can get with current conditions, then apply those upgrades at a time when terms are longer and rates are higher. Since tenants are warned regarding tougher standards for returning the property, we can often use a portion of the deposit to apply to a more in-depth refresh of the home. We don’t do this in an underhanded way, but rather set the terms clearly before they move in. However, if you accept slightly less qualified tenants or multiple pets, they tend to offer up that subsidy by their own actions.

Winter rental management is without a doubt the most challenging time for landlords, but with some savvy strategy and reasonable expectations we can usually make good lemonade from those lemons. More importantly, we always make sure to get on the summer schedule (or mid-year to be more exact) which eliminates most of these issues for years to come.

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