Tyler’s Mistake of the Month Newsletter

How it happens…

Every real estate investor aspires to generate consistent passive income from their portfolio. However, one common misstep that many make is not being adequately prepared for vacancies. This mistake can occur in various forms. 

First, investors often neglect to factor in vacancy rates when calculating potential returns, leading to over-optimistic projections. They may consider the best-case scenario of constant occupancy, ignoring the fact that a property can stay unoccupied for weeks or even months. 

Secondly, many investors fail to set aside funds for unexpected vacancies, which can occur due to reasons ranging from seasonal fluctuations, tenant turnover, to property damage needing repair. 

Lastly, it’s a common practice for investors to refinance their properties or take on more debt based on the full rental income, leaving them in a financial crunch when vacancies arise. The severity of the issue becomes clear when the expenses associated with the property, like mortgages, taxes, insurance, and maintenance costs, continue unabated while the revenue stream dries up. 

Ways to avoid the mistake:

Avoiding the mistake of being unprepared for vacancies involves thorough planning and prudent financial management. Start by performing diligent market research to get a realistic estimate of the local vacancy rate, which varies based on location, property type, and price segment. This helps in creating more accurate financial forecasts. 

The next crucial step is to establish a contingency fund, which should ideally cover all property-related expenses for at least three to six months. This cushioning allows investors to ride out unexpected periods of vacancy without jeopardizing their financial stability. Furthermore, consider vacancy periods when you are deciding on leverage levels for your properties. 

Refrain from refinancing or borrowing based on a fully occupied scenario, as this can lead to unnecessary financial pressure during vacancies. 

Lastly, develop a robust tenant retention strategy as high tenant turnover typically leads to extended vacancies. This may include fostering good relationships with tenants, timely resolution of issues, and ensuring the property is well-maintained and competitively priced.

How to deal with the mistake:

Even with the best precautions, you may find yourself in a situation where you are already grappling with unexpected vacancies and the financial strains that come with it. If you’ve made the mistake and are unprepared for this situation, it’s crucial to focus on recovery. 

To begin with, reassess your financial plan and budget. Focus on cost-saving measures and prioritize your spending to cover your most pressing expenses. If you’re strapped for cash, consider options like short-term loans or tapping into your personal savings to tide over the immediate financial crisis. 

Simultaneously, concentrate on filling up the vacant properties. Invest in making your property more appealing, enlist the help of real estate agents, and consider flexible lease terms or temporary discounts to attract tenants quickly. In the long term, reflect on this experience to revise your financial planning, incorporating lessons learned about vacancy rates, setting up a contingency fund, and responsible borrowing.