Investing in Real Estate 108 (Vacancies)

“…If you would like to leave a message, please do so after the tone… BEEP”

“Hi The Frugal Samurai, it’s Kay here – listen I’ve got some bad news, the tenants in your property at 123 Slightly-Above-Average-Investment Drive have given notice to vacate, they’ll be gone in 4 weeks. Oh and the other tenants at 456 Cash-Flow-Drain-But-I-Can’t-Sell-Because-Of-The-Growth Street have also advised they won’t be taking up their lease when it expires in July… Goodbye”

FFFFFF!

Goodbye to you too Kay you FFFFFFFffffff!

Joking joking, love you Kay, tier 1 property manager she is.

What’s up dudes and dudettes!

As you can see – not the most ideal time for yours truly at the moment, because looks like not one but two of the properties in the portfolio won’t be generating an income before too long.

No income = no good.

Luckily though I’ve gone through periods of no rental income before – but that was only one at a time.

This time should be interesting to see how I manage the cash-flows given the anticipated vacancies.

Hopefully I’ll be able to get some tenants in pronto.

But I’m confident of getting past this period off the back of these 5 little strategies.

Under-market rent

In property investing the predominant source of income is from the rent received – that’s why tenants are the life blood (see what I did there) of your investment.

In my experience, your tenants tend to be human beings – you know the same humans as you and I.

So how many human beings like to pay more than they have to?

Zero.

Similarly when setting the rent, you might want (as the landlord) to squeeze every last drop out of that orange, but squeeze too hard – then no one’s going to be around to drink it.

That’s why some savvy landlords don’t set the asking rent at full market price. They set it at 95% of market.

Remember when Scotch Fillet (Ribeye) was last on sale at the supermarket? Didn’t you pick a steak or two up? I know I did. I love a good Scotch Fillet, nice and medium rare, with a bit of mushrooms and gravy on top, wouldn’t mind a good mash and veges on the side… “licks lips”, ah Fook forgot me (gravy) train of thought… knew I shouldn’t be blogging before dinner…

Ahem, anyway point being – set the rent slightly below market, you’ll get more interest.

More interest = bigger tenant pool = more choice = higher likelihood of picking the best tenant.

Research

“But TheFrugalSamurai Sir, how do you know what market rent is?”

Easy peasy, you gotta research.

“Awww, do I have to?”

You can’t get away from it – you thought that after buying a property that was it wasn’t it?

INCORRECT.

The hard part is managing your investment, that’s where the real time and effort starts.

Luckily, there are so many sources to determine what market rent should be.

The most common being:

• https://www.realestate.com.au/rent
• https://www.domain.com.au/?mode=rent
• The real estate agencies (property management divisions), think the local LJ Hooker, Ray White, First National etc.
• Other investors

Oh and by the way, did you know in Australia, “ribeye” is used when the cut is served with the bone in. With the bone removed, it is called “Scotch fillet”? Oh man, I am hungry.

Rely on property manager

However, I find that the easiest way and most common method of determining the rent is to rely on the advice of your property manager.

Come on let’s face it – a good property manager has a good 100 or so (often more) properties under management. Now that’s a lot of landlords.

So not only do they come across vacancies and tenancy issues every day, they also should have a very good understanding of the local property market.

Asking them what the market rent should be, what their thoughts are on the rental market (quick/slow) and what type of properties move fastest (renovated/unrenovated) are just some of the questions you should pose.

After all, you’re paying them to manage your property – they should be part of your go to team.

A wise investor once told me that agents are like dates, once you both get what you want, most times it’s see ya later. But property managers are like your spouse, you build the long term relationships with them.

Lease terms

Knock knock.

Who’s there.

No one.

No one who?

No one moves house in the middle of winter.

This is SO true, here in Australia rarely if ever does anyone move house in winter.

The days are short, the nights are long, the air is chilled and the winds are biting.

Seriously, I don’t know how you Northern Hemispherers do it in winter, I ESPECIALLY don’t know how you Northern Northerners do it – are you guys insane? Forget winter is coming, winter has COME.

Anyway, back on topic – in Australia, people rarely move mid-year. The kids are settled at school, your job is settled at work, end of financial year is approaching and most of all – IT’S COLD.

Throw in the turmoil of potential homelessness during winter, then nah – no one moves mid-year. Stay warm and safe in comfortable surroundings I say.

That’s why with mid-year leases, best to either extend for 6 or 18 months until January/February (the best time to move).

Mind you, I do like buying during Winter, but that’s another story.

Speaking of stories, Wikipedia states that “Ribeye/Scotch Fillet steaks is both flavorful and tender, coming from the lightly worked upper rib cage area. Its marbling of fat makes it very good for fast and hot cooking”. Damn you Wikipedia, damn you for your delicious descriptions.

Cash flow buffer

Personally, the most important consideration is the fact that I should have sufficient cash-flow buffers to tide me over through this period.

It’s just sensible risk management to have sufficient buffers for just-in-case scenarios.

You didn’t think that the tenants were going to stay forever did you?

That’s why with any investment, management of risk is arguably more important than the pursuit of returns.

In property investing, how you manage your cash flow is paramount to managing this risk.

Always, always, always build buffers into your assessments and positions otherwise your investment journey will probably be derailed at the first sign of turbulence.

I’m more annoyed with the fact that I’ll have to pay the additional fees to the property manager for finding new tenants – yeah there’s no free lunch in life.

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P.S. I did have Scotch Fillet steak with orange juice for dinner… it was glorious.

P.P.S Read some of my earlier posts on real estate here:

Investing in Real Estate 107B (a House or an Apartment, 5 More Learnings)

Investing in Real Estate 107A (A House or an Apartment)?

Investing in Real Estate 106 (Your Strategy)

Investing in Real Estate 105 (Your Team)