On the surface, vacant rentals seem like just a temporary glitch in your rental income but they can turn into black holes that drain your profits fast. Every rent-free day comes with ongoing costs and the potential for property damage. Understanding the hidden costs of vacancies can help you keep your rental business profitable.
Lost rental income is the most obvious loss
Once you get into the flow of receiving rent every month, it can throw you off track when it stops. When your rental income stops coming in, your mortgage is still due and you’ll need to pay it out of pocket. Every month of missed rent will add up over time. For example, a 4.7% vacancy rate across a seven-unit portfolio earning $1,200/month per unit equals a loss of $4,738 for the year.
It’s crucial to get a handle on your vacancies to prevent a cascade of losses you have to cover out of your own pocket. With smart and aggressive marketing, you can reduce vacancies but the ultimate strategy is to acquire high-quality, long-term tenants.
A vacant home is a target for vandalism
An unoccupied property can attract trespassers who damage the property. If the lawn is overgrown, mail is building up, or the windows are always dark, that’s an invitation for vandals and thieves. Damage claims against vacant properties are common and that’s why insurance companies either exclude coverage or require proactive measures.
To protect your empty property, you can board up openings with plywood or steel mesh, install a 10-foot-high chain-link fence around the property, and post no trespassing and private property signs. These methods will keep most trespassers out and can help you recover damages should an incident occur.
An empty home can attract squatters
The last thing you want to deal with is a squatter. In many jurisdictions, they have more rights than property owners. Getting a squatter out isn’t easy. You can’t just call the police and report them as a trespasser. Since police have no way of verifying whether or not they’re a squatter or a renter being targeted, you have to go through a formal eviction process in court. And in some areas, squatters can gain legal rights to an empty property in as little as 30 days.
Squatters often cause extensive damage to properties, including broken locks, stripped copper wiring, and rodent infestations from piling up trash. In some cases, landlords have even been held liable for injuries sustained by squatters on their property.
In short, you want to avoid squatters at all costs. If you think a property will be vacant for longer than a couple of weeks, be proactive and secure it as best as possible. You may even want to install a security camera so you can call the police the moment anyone sets foot on the property.
Maintenance delays are more likely with a vacancy
A slow leak under the sink or a tiny roof leak can go undetected for weeks or months in a vacant unit, causing mold, structural rot, and foundation damage. Water damage, in particular, is one of the most common and expensive claims for homeowners, averaging $12,514 per incident.
Homes need airflow and basic upkeep to avoid deteriorating and in cold climates, an unheated home is at risk for frozen pipes. In hot or humid regions (which can include cold climates), stagnant air can accelerate mold growth.
At the end of the day, an empty home is more than just lost rent. It’s at risk for several types of damage that can cost you far more than what you’ll lose in rent.
Some cities fine owners of vacant homes
Vacancy taxes are real. California cities like Oakland and Berkeley impose hefty penalties of $3,000 to $6,000 per year. In Oakland, a property is considered vacant when it’s used less than 50 days a year. In Berkeley, homes must be in use for at least 183 days per year to avoid the vacancy tax. San Francisco has a commercial vacancy tax that fines owners $250 to $1,000 per linear foot of frontage if the property is unused for more than 182 days in the year.
Do what it takes to limit vacancies
Whether you own one property or multiple, make the effort to limit vacancies as much as possible. The expenses can creep up on you in the form of lost rent, extensive damage, and regulatory penalties. But don’t settle for any tenant just to fill a unit. Maintain your marketing efforts and screen tenants to high standards for better long-term results.
