Followers of this blog know that I’m really into real estate investments. There are just so many advantages to owning real estate. That is why I believe real estate should be a cornerstone of your investment portfolio because it most certainly is in mine.
Some of the advantages include the ability to use leverage (in the form of a mortgage), predictable cash flow, the ability to add/create value, and great tax benefits. The last one in particular is how I am able to generate over $200,000 of cash flow without paying a cent in income taxes.
I currently own 6 investment properties totaling to 18 rental units. With so many rental units, I expect turnover in tenants in any given year.
Therefore, it comes as no surprise to me that I currently have a vacant apartment I need to rent out with another vacancy on its way.
There are many things I need to consider when dealing with this vacant apartment. Hopefully, these considerations can provide you with some insight into how I deal with a vacant apartment.
My Objective For The Vacant Unit Is To Rent It Out For Market Price As Soon As Possible To Good Tenants
First and foremost, I need to rent out the apartment. A vacant apartment is not earning me a return.
The way I view a vacant apartment is that with each passing day, I am not only missing rental income, I am actually losing money. This view pushes me to work faster in renting out the apartment. It isn’t that I didn’t make money; it is that I am losing money.
It really lights a fight under my belly when I am losing money to make the loss stop as soon as possible.
The thought of preventing me from losing money really helps motivate me at renting out the apartment.
Don’t be lulled into complacency on not moving quickly on renting out a vacant apartment because there is no cash out flow from you. There should always be a sense of urgency in getting it rented.
Now the question becomes two folds: (1) how much should I rent my apartment; and (2) who should I hire to help me rent my apartment.
Setting The Right Rental Price
On the question of how much to rent my apartment, I try to get a sense of the rental market by doing some research online.
I usually use Zillow to help me get a sense of the rental market. I punch in my address in Zillow and look for comparable rental apartments in my neighborhood.
Obviously, Zillow isn’t the end all be all. It gives a good sense of the market rental rate to help me formula a rental price range. But there are a lot of variables and differences between apartments. It is hard to account for all the adjustments between the apartments I see in Zillow compared to my apartment.
I also want good tenants in the unit. Bad tenants can be a giant headache. I want my rent to be competitive to be able to attract good tenants. Pricing the apartment too high can drive away prospects from checking out the apartment.
Hiring The Right Broker
The next move is to hire the right rental broker for this apartment. My preference is to use someone who I had a positive interaction with and someone who specializes in rentals in the neighborhood.
I don’t personally have a great rental broker I would like to use for this neighborhood. Therefore, I went to someone I know who owns more than 30 rental properties to ask if he has a good rental broker he can refer.
The next best thing from having direct experience with a broker is to get a good recommendation from a family or friend.
He introduced me to a rental broker. The rental broker helped him in the past with the rental of 3 units and did it fairly quickly. Additionally, the rental broker specializes in the neighborhood of my vacant unit.
Assessing The Broker’s Recommended Listing Price
I met up with him to give him a tour of my apartment. He came to a rental price that is higher than my expectation based on my research. I asked him how he can justify the rental price.
Interestingly, one would think that a higher listing price is good. If the broker thinks it is worth more than what I expect, why wasn’t I jumping for joy?
Well, the downside of listing a unit with too high of a price relative to the market is that it can sit vacant for a long time. Then, I might need to price adjust to the market. He thinks he can list it for a high rental price and have a shot of getting it.
Obviously, if the market rental rate is higher than my expectation, I don’t want to lose out on the extra rental amount. But on the downside, if I price it too high, then I can lose one or two months of rental income while it sits on the market. Then I would still need to adjust the rental price down.
Therefore, getting the rental listing price right is paramount.
I asked him for the rationale as to why he thinks it can rent for higher. He explained to me that my apartment is a duplex, with an outdoor private garden (a premium in Brooklyn), and that we are entering the heart of the rental season in my neighborhood.
What he said made sense to me and I agreed to the higher listing price. Hopefully, he wouldn’t let me down.
Thinking Through The Broker’s Fee And Tenant Qualifications
I also discussed the fee with the broker. In New York City, the rental fee is usually 15% of the total rent for the first year. This amount is usually paid by the tenants.
However, there are quite a number of rental units in the market place and a few in which the landlord will pay the rental broker’s fee. Those apartments are known as no fee rental apartments.
In order for me to get maximize rent and to be competitive with other units, I’ve decided to pay for the rental broker’s fee instead of the usual route of having the tenants pay. The rental fee I’ve negotiated with this broker is for 1 month of rent, amounting to 8.33% of the annual rent.
I told the rental broker I want someone with good credit and enough annual income to be 40 times the rent. I am also okay with guarantors in lieu of a strong income. I’ve had good experience with renters with strong guarantors.
I also want at least first month’s rent and security deposit amounting to another month of rent. Therefore, at least 2 months of rent in advance. If the tenant is shakier in credit or income, then I would get 3 months’ worth in advance, first month, last month’s rent and a security deposit.
Potential For Conversion From 2 Bedroom to 3 Bedroom
One of my considerations is if I should do work on the property to maximize rent. As previously mentioned, it is a duplex with 2 bedrooms on top, 2 bathrooms, a private outdoor space, and a giant recreational space on the lower level.
The question I have is if I should convert it into a 3 bedroom rental. It would involve some work as I would need to move the current kitchen position in order to accomplish that.
A 3 bedroom/2 bathroom duplex with a private outdoor space would rent for more but it would also involve more time on my part managing the conversion, more cost and also would result in my apartment sitting vacant longer on the market while the conversion is being done.
The unit is already in good shape and I actually factored that in the purchase price of the building. I ran the analysis and the incremental rent would not offset all the negatives with performing the conversion I mentioned in the previous paragraph.
Therefore, I opted to not move ahead with the conversion work on the apartment. This is not a wise decision long term because once I am done with the conversion; I can collect the increased rent forever. Not to mention, I can sell the property for a higher price if I ever decided on selling.
But for now, I have no intention of selling the property and I do not want to spend the incremental time, energy and money on doing the conversion work necessary to turn it into a 3 bedroom.
Potential for Cosmetic and Small Renovation Work
While I have decided not to do major renovation work including converting the unit from a 2 bedroom to a 3 bedroom, I have decided to do a few cosmetic and small improvement projects. Most of the work involves improving the private backyard space and improving access to that space.
Currently, the backyard space can only be accessed through the lower floor entrance doorway. I want to add another door to allow people on the upper floor of the duplex access to the backyard as well.
This can allow for both access to the backyard from the upper level and the lower level of the duplex and makes the outdoor space more accessible to the tenants of the unit.
Adding that additional access to the backyard should be low cost since there is a good size window where I want to put the door already. I just need the contractor to swap out the window for a door and have the contractor build a small staircase leading down to the yard. This should have a positive impact on the rental.
In addition, I want to improve the appearance of the backyard by replacing the chained fence with a new white vinyl fence and placing artificial green grass on the floor.
I expect this to run a few thousand dollars and should result in a more beautiful and clean look for the backyard. Additionally, the fencing should provide for more privacy to the tenants. Hopefully, these changes can result in greater rental income for the unit.
The small improvement work can be completed in a couple of weeks and the unit should not sit empty for too long. I want to have the rental unit ready to take advantage of the peak rental season.
It Is Beneficial To Be Friendly To Neighbors
It pays to be friendly to neighbors and other tenants in the building. With a vacant apartment, it is useful to have as many people looking out after the unit as possible.
A vacant apartment can present all kinds of risk. Incidents such as flooding or break-ins can happen. It is always good to have someone else pay a watchful eye on the unit especially since I don’t spend a lot of time going to the vacant unit.
The apartment is about 30 minutes away from my home. I do not plan to go there often and would only go when I am needed there.
Therefore, it is very beneficial to have neighbors or other tenants who can look out for that vacant rental unit. Not to mention, they also come in handy in helping to provide access to the unit for contractors, rental brokers, and prospective tenants.
Do Not Neglect The Small Things
It is easy to forget doing the small things also when a tenant vacates my rental unit. Therefore, it is good to keep a checklist in place of the items to complete when a tenant moves out and in preparing the unit for the next renters.
Among the small things to consider is the switch in ownership of the utility accounts (such as the electricity account). If the electricity company decides to turn off the light once the previous tenants closed out their account, it would be very hard for the rental broker to show the unit at night.
Another small item to do at some point is to replace the lock for the new tenants. I usually do this after the apartment is rented. This is because my rental broker has a set of keys to the apartment in order to show the apartment whenever to his clients. I would prefer for a new set of keys only my new tenant would get.
Before the new tenants move in, be sure to communicate general housekeeping items with them such as what to do with garbage and recycling, who is the contract for issues with the apartment and how rent can be delivered.
To the audience: Is there anything else I should be doing in renting out my apartment? Do you have any advice regarding maximizing rental income? Any good rental stories you would like to share with the readers?
Many people work hard to better their physical and mental health. What about their financial health?
I started this blog back in 2019 to help people better their financial health as well.
My financial journey began with tens of thousands in student loan debt. Over the span of 20 years, I am close to achieving financial independence.
I truly believe anyone can get to strong financial health. Hopefully, this blog can help you on your financial journey to greater wealth and financial independence.
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