One of the biggest lessons I learned as a landlord is that it’s exponentially cheaper to keep a tenant than find a new one. The only exception to this rule is when you have to evict somebody for nonpayment. But when it comes to your best tenants, they’re worth keeping.
A lot of first-time landlords make the mistake of driving tenants away by consistently raising the rent. I don’t increase rent when I have a good tenant who pays on time.
Before we get into more tenant retention strategies, let’s consider the lifetime value of a tenant.
How to calculate the lifetime value of a tenant
To calculate the lifetime value of a tenant, you’ll need to estimate the length of stay for one of your tenants.
There is a dramatic difference between multifamily and single-family tenants. My single-family tenants, for example, stay an average of three years, while my multifamily tenants have an average tenancy of just 12 months.
Let’s create a theoretical situation:
- The rental is a single-family property.
- Rent is $1,100 a month for the next three years.
- We need 20% ($220) a month for taxes, insurance, and maintenance expenses.
(Gross monthly rent * X months) – 20% = lifetime value of tenant
- Gross revenue (36 months x $1,100) = $39,600
- Minus estimated expenses (20%) = $7,920
- Lifetime value of a single-family tenant = 31,680
A lot of my friends have tried to convince me to increase the rent I charge to a more market-wide rate of $1,300/month. That increase would earn me an extra $2,400 a year in gross revenue!
However, it takes me two to three months to get a property rented. That’s because I like to paint, perform upgrades, and do some landscaping. Those upgrades generally take a few weeks and cost around $3,500. Therefore, I usually net a negative return on investment during my first year.
In my experience, landlords underestimate how long it will take a property to get re-rented. Let’s look at a everything that goes into a tenant turnover:
- Repair work
- Lease signing
Also, if your lease ends mid-month, many tenants will be moving from another rental property, and they might want to finish out their lease their since they have paid for it. This causes additional delays in re-renting.
It’s possible to re-rent a property with no vacancy period, but it could also take six months. That’s why I make my calculations using a three-month average vacancy period.
Additionally, from a cash-flow perspective, changing tenants could potentially put me in a tight place if they move out in the fall season, when my property taxes are due. Then I would have zero revenue coming in when I need it most.
I calculate the cost of tenant turnover as follows:
- Remodeling cost: $3,500
- Lost rent: $3,300
- Total turnover cost: $6,800
My friends think I can make an extra $2,400 in rent, which equals $7,200 over three years. Subtract $1,440 (20%) to get net cash flow of $5,760.
However, my cost of turnover is $6,800.
Therefore, it’s better for me to keep a good tenant in the property. The new tenant who pays the extra rent will cost me $1,040 ($6,800 – $5,760).
Now that I’ve shown why it can be better to keep a tenant than have turnover, let’s look at six tenant retention strategies.
6 ways to reduce turnover
1. Remember special dates
Write down your tenants’ birthdays and any applicable anniversaries. Even a simple email or text recognizing those special days can greatly improve your relationship. I also like to give my tenants a small gift during the holiday season.
Most landlords don’t do these things, so your tenants will notice and appreciate the gestures!
2. Give discounts
When my tenants first move in, I provide them with a list of my favorite local stores and restaurants. I also pass along any standing discounts these merchants offer.
Or you could buy a local coupon book and give it to them. I have found that tenants moving in from out of town really appreciate this gesture.
3. Upgrade the property
Property upgrades make a rental unit more desirable over the long-term and they’ll significantly reduce your turnover rates. I usually add a new coat of paint when the tenant asks, and I even let them choose the color. But I make sure the paint color they choose isn’t too crazy.
Another upgrade I provide is a washer/dryer for some of my multifamily units. This is a huge advantage when they are comparing my properties to others.
4. Invest in energy efficiency
I’m a big fan of energy efficiency because the number one complaint I get about my older properties is the cost of the utilities.
Most people recommend energy-efficient lighting. However, since people can be picky with their lighting, I’ve found that this isn’t the best upgrade. I like to improve the insulation of the house, because a roll of insulation is only $15 and has almost a guaranteed return on investment.
My favorite energy upgrade is a water heater blanket. I usually pay around $20 for one, and I have noticed an immediate $5/month savings at my own house.
5. Improve security
Smart locks are a valuable item that will be the new standard for properties in the next five years. The best thing about these locks: they’re useful for maintenance workers who need temporary access to a property. You can give a maintenance worker a temporary code that won’t work after one use.
Another security upgrade you can make is a full alarm system. Here’s a tip: You can get an alarm system installed for free. The tenant would be required to pay for the monthly monitoring.
6. Upgrade the landscaping
I have found landscaping to be one of the highest returns on investments for my rentals. This is primarily because I do it myself.
Some basic jobs I do for tenants once a year:
- Clean gutters
- Trim shrubs
- Spray the lawn with weed killer and nutrients for the grass
- Buy flowers for window boxes
- Add a welcome mat
I don’t tell my tenants about the work I do beforehand, and they always consider it a nice surprise when I do these things for free. My landscaping costs combined are less than $100, which is a good investment that leads to happier tenants who stay longer.
I hope these tenant retention strategies will help you keep tenants longer and help you become a more profitable landlord.
If you think I missed a strategy, let me know in the comments!