Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
After owning rentals for 13 years, I can tell you that the quickest way to get poor with real estate is not aggressively managing vacancies.
When I got started, I knew that vacancies were “bad,” but I didn’t know how bad until I did the math when I had a tenant move from my third rental.
The rent was $950 a month. The mortgage payment was $350. Taxes were $217. And the insurance was $55, for a total of $622 in cash expenses per month. I say cash expenses because I like to put away a few bucks every month for future repairs.
That left a net cash flow of $328 per month for this house. Great.
So what happened when I had a vacancy?
I still had to pay my mortgage, taxes and insurance, so I had to cover the $622 out of my pocket. Not great.
So if the house normally cash flows $328 per month, then for every month it’s vacant, I have to pay the $622 – that’s almost twice the net cash flow I make when it’s rented. So it takes nearly 2 months to just break even.
Taking it one step further, if it stays vacant for 2 months, then it takes 4 months to break even.
Which, in that scenario, means I barely break even on that house for 6 full months.
Not the way to run a business I’d say.
Live and Learn
I bring this up because after a couple of years doing this I got smart and figured out a way to reduce my vacancies before I even buy a rental.
How?
Buy buying great houses in great school districts.
Seems pretty simple. It is. And it works.
Once I put this strategy into play, I noticed a big difference. My tenants stayed longer. They took better care of the houses while they lived there. And they wanted their security deposits back so they actually left them clean when they moved.
Shocking, I know.
I had a tenant move out of one of my houses in the best school district in the state a couple of months ago…
She was a great tenant and had been with me for five and a half years. She made small repairs herself. She planted flowers and kept the outside looking great. And she had been late with the rent a total of 3 times over 5 years.
She called me 30 days ahead on the dot per the lease to give me notice. We scheduled the walk-through, and she told me that she would be leaving the house clean enough to re-rent, and she was looking forward to getting her full security deposit back.
Having seen the inside numerous times over the 5 years, I believed her. So I started marketing the property to prospective renters.
When the time came for the walk-through, I had a list of about 2 dozen well-qualified and prescreened prospects. And a house that was pretty much spotless.
I picked a tenant who wanted to take possession mid-month, and they passed the background check with flying colors. All I did was send a cleaning crew through to give it a good once over. But it barely needed it.
So I was able to reduce my vacancy on that house to basically 2 weeks – over 5 years. Which makes my breakeven only 1 month.
With a total turnover cost of just under $300 bucks.
I like that math. A lot!
Now I know you can find good tenants in a lot of different areas. And I get into “spirited” conversations with other landlords who swear by inner city properties or fringe suburbs or Section 8.
They all do well and they’re all happy. Which is great.
But not a single one of them can match my retention rate, and I don’t know of anything with a longer-term ROI than great houses in great school districts.
So in my book, it pays to buy fewer. And buy better. You can take that to the bank!
I do.
Do You?
Share your landlording and vacancy experiences in the comments section below.
Dennis Fassett
earned a BS in Economics and followed that up with an MBA in finance. After working and corporate finance and banking for several years, he started buying single family houses, and quickly built a very nice portfolio of cash flowing rentals. When the credit markets started to dry up and he couldn’t get any additional single family mortgages he shifted his focus to apartment buildings. He now has over $3 million in rental real estate. He manages most of it his self and still has a day job. Dennis has even created his own Private Equity fund to buy apartment buildings.