Real estate investment can be a profitable venture. Regardless of how experienced you are in the industry, investing in a rental property can lead to rewarding gains. As with any investment, there is a risk you take when investing in rental properties; like an unexpected vacancy.
The definition of vacancy is an unoccupied space or position. In real estate, vacancy is a term used to refer to the lack of an occupant in a home. Most often, this word is used to denote the absence of a tenant in a rental property.
Vacancy is a very real risk for property investors and it is definitely no joke. It is a costly situation for any property owner and, unfortunately, cannot always be avoided. Being aware of this valid risk before investing will go a long way in making sure you aren’t caught off guard if it happens to you. Do you research and analyze the vacancy costs before you take ownership, so you are completely prepared for the event when it arises.
What Are Vacancy Costs?
When considering vacancy costs, it is important to understand what this term actually encompasses. When a property sits vacant, a tenant is not paying rent and therefore, you are losing the monthly cash flow you usually would receive. But, this isn’t the only thing a property vacancy will cost you.
There is a wide range of expenses which can accumulate over the period of a vacancy.
Taxes
A property tax is determined by the value of the property itself and is usually collected by the governing authority of the area. If this tax is not paid after a period of time, the governing authority can take ownership of the property to settle the unpaid debt. Regardless of whether the property is rented, this tax will require payment to avoid forfeiture of your turnkey rental home investment.
Insurance
If you have financed any portion of the property purchase price, you are likely to be required to carry an insurance policy by the financial institution. Even if you have purchased the property in cash, it is likely you will have an insurance policy on the property to protect yourself in the case of any damage to the property.
These policies will come with a monthly premium which can vary in amount by the type of policy and the values you have selected. Missing payments can lead to the invalidation of your policy. These payments will be required to be made even if the property is vacant.
Maintenance
Don’t think you can skimp on maintenance just because there is no tenant on the property. In fact, you can count on having to do additional maintenance, such as cleaning, that would normally be handled by the tenant.
In addition to landscaping and mowing, you need to have a cleaner for periods of vacancy. Keep in mind that the property needs to be show-worthy in order to secure another tenant. So having the property cleaned regularly will help avoid any musty smells and dust accumulation. You’ll also want to hire a pest control company. Vacant homes attract bugs and rodents. The last thing you want while showing a property to potential tenant is to stumble upon these critters.
If you have a pool or hot tub on the premises, you’ll need to hire someone to maintain this feature while the home sits empty. Nothing is less attractive to a potential client than a bright green, nasty pool. You want the property to be appealing and inviting in order to secure a new tenant, so keeping up on all additional features of the property is vital.
Security
If you do not live in the area in which you invest, you will most likely need to hire a security company to protect your vacant investment. A vacant home is a calling card to squatters, vandals, and thieves. All of which can be extremely expensive to correct if they do manage to strike your property. Having a security system—whether automated or live, will help to protect the property from any costly damages or situations that can arise from having a property sit vacant for an extended period of time. Regardless of the security plan you opt to go with, you are going to have to pay a monthly fee for the service.
Vandalism
Even with a security plan in place, a vacant property could be subject to vandalism. Vandalism often occurs in properties that have sat empty for an extended period of time. It can be expensive to correct, depending on the level of damage incurred, and often off-putting to any potential renters who may have driven by to check out the property before calling for a showing.
While vacancy can happen to any investor there are steps that you can take to help avoid an extended vacancy opening. Fully vetting tenants prior to offering a lease will help you find longer lasting renters. Hiring a property management company will give you a pool of tenants to choose from and access to marketing tools you wouldn’t have been able to utilize before. Keeping long-term tenants happy and rental payments in line with market averages will also help lower the chance for vacancy.
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