Renting out a property is an attractive business venture. Thus, many landlords are keen to make sure their properties will never be vacant. Roughly speaking though, vacancy rates for rental properties average around 10% worldwide despite the best strategies and finance / pricing options. But what are the direct costs of having a vacant rental property?
What Are the Direct Costs?
The direct costs of rental property vacancy are expenses incurred due to lack of tenant usage, such as:
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- Loss of rental income
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- Utility bills for the vacant space
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- Advertising expenses for locating tenants
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- Cleaning and maintenance of vacant units
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- Rent incentive fees
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- Property management fees
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- Security costs
Ideally, these costs are refunded or off-set against the rental income of a tenant. Unfortunately, when a rental property sits empty, such fees cannot be recovered.
The Cost of Lost Rental Income
It can take several weeks, if not months, to find a tenant. During this time, all the rental income has been lost. Some landlords may attempt to reduce the loss of income by lowering the rate of rent. But, the rental market is always in flux, so this may not be a sound business move in the long run.
High Utility Bills
A vacant rental property runs the risk of high utility bills. All utility expenses are the landlord’s responsibility and for the empty unit, there is no one to share the costs. If the property is not winterized or checked on a regular basis, those costs could quickly accumulate.
Advertising Expenses for Tenant Search
Finding the right tenant for a rental property is both time-consuming and costly. Landlords should invest in a detailed and comprehensive marketing plan for their vacant properties. This could involve creating web listings and online advertisements, placing newspaper ads, and attending open houses. Each of these initiatives poses another expense.
Cleaning & Maintenance Costs of Vacant Units
Empty units need cleaning and maintenance to make them look appealing and ready for rental. Such services are often outsourced, which means more money spent – without the potential to recover the fees through rental income.
Rent Incentive Fees
Some landlords will offer rent incentive fees in a bid to attract a tenant. However, the incentive is often a percentage of the market rent, which can be a hefty sum depending on the property and the situation.
Property Management Fees
Property management services cost money. Whether the landlord can afford to pay these fees out of their own pocket or must take out a loan, they’ll still face the financial burden of an empty property. This is an expense landlords should strive to minimize.
Security Costs
Most landlords are liable for the security of their property, whether it’s occupied or not. Investing in the right insurance policy can help, but landlords may also need to spend money on improved security systems and more regular monitoring. Not to mention, if a property is left empty for an extended period of time, landlords should consider paying for security guards.
The Risk of Property Damage An empty property runs the risk of vandalism and other forms of damage due to its prolonged vacancy. Landlords must factor this in to their budget when a property sits void of tenants.
Actionable Tips for Reducing Vacancy Rates
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- Increase the quality of the rental property
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- Target in-demand demographics
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- Prioritize a short lead time
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- Focus on tenant retention
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- Be active on rental listing sites
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- Manage potential tenant tours well
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- Advertise the local community
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- Know the legal obligations of renting a property
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- Set realistic rental prices
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- Maintain good relationships with former tenants
What kind of expenses are associated with vacant rental properties?
1. Property Taxes: Property taxes must be paid annually on the rental property, whether it is occupied or vacant.
2. Insurance: Vacant properties must still be adequately insured against common risks such as theft, fire, or liability.
3. Maintenance/Repairs: The landlord must remain vigilant about maintenance and repairs, even if the property is vacant.
4. Utility Bills: The landlord may be responsible for paying these bills, even when the property is vacant.
5. Advertising Costs: The landlord may need to spend money on advertising to promote the rental property and find tenants.
6. Rent Incentives: That could include offering a discounted rent or move-in specials for the first few months to entice potential tenants.
7. Security Costs: Some landlords may need to hire security to patrol the property or install cameras to prevent vandalism.
What expenses should a landlord consider before renting a vacant property?
1. Advertising costs – These typically include the cost of creating and placing ads for potential tenants.
2. Legal costs – These include fees for drawing up and reviewing rental contracts, as well as fees for any legal services relating to the tenancy, such as evictions.
3. Maintenance and repair costs – You’ll need to factor in the cost of any necessary repairs and maintenance to the property before you rent it to tenants.
4. Administrative costs – This includes additional costs related to setting up the tenancy, such as running credit and background checks on the tenant.
5. HOA Fees – If the property is in a planned community, you’ll need to factor in the cost of any applicable Homeowner Association fees.
6. Property taxes – Depending on the property’s location, there may be taxes due that need to be factored into the rent price.
7. Insurance – You’ll need to take out an insurance policy to cover the property against any damages or losses caused by the tenants.
Conclusion
The direct costs of a vacant rental property can quickly add up. Loss of rental income, high utility bills, advertising expenses, maintenance costs, rent incentives, and security fees can all unavoidably crop up when a unit is empty. To ensure that the business doesn’t suffer due to vacancy, landlords should remain vigilant and attentive to the market and their properties.