Vacancy Costs San Diego Landlords Should Account For

Vacancies are an inevitable part of owning rental property. There are too many external factors you cannot control, such as the rental market and economic conditions. Most landlords immediately think of the most obvious cost of vacancy: lost rental income.

The true cost of vacancy often becomes apparent after bills start piling up. Suddenly, it's not just lost rent that's affecting your cash flow. Property owners need to consider all the expenses that come with vacant units to be fully prepared. Here are a few things you should account for:

Key Highlights:

• Vacancy costs extend beyond lost rental income and can significantly impact a property's profitability, cash flow, and long-term financial performance.
• Landlords should account for turnover expenses such as cleaning, repairs, cosmetic upgrades, and landscaping when preparing a vacant unit for new tenants.
• Marketing costs, including listing fees, professional photography, virtual tours, and property showings, are often necessary to reduce vacancy periods and attract qualified renters.
• Ongoing operating expenses such as mortgage payments, property taxes, insurance premiums, and utilities continue even when a rental unit is unoccupied.
• Proactive tenant retention strategies can help minimize vacancies, reduce turnover costs, and protect rental income in San Diego's competitive rental market.

1. Lost Rental Income

While obvious, it is still worth mentioning. Landlords are often concerned about the short-term effects of vacant properties, but prolonged vacancies can significantly affect your property's annual cash flow and profitability. Without profits, your options for improvements are limited, and you may not be able to maintain the property for the next tenant.

2. Turnover Costs

Rental property owners will soon have to worry about preparing the property to look like it did before someone lived in it. Turnover costs can include:

• Cleaning Expenses: You might have to hire professional cleaning services to prepare the unit if you don't have the time or equipment to do a deep clean.
• Repairs and Maintenance: Even if the previous tenant left no damage, you still need to address normal wear and tear or deferred maintenance before listing your vacant rental property, as these issues can reduce your property's value.
• Cosmetic Upgrades: If your rental property has been occupied for years, you should consider the interior. Outdated furnishings and designs can prolong rental vacancy.
• Landscaping and Curb Appeal: Maintaining the exterior of your property is just as important, and losing a tenant doesn't stop plants from overgrowing or paint from fading.

3. Marketing Expenses

The quickest way to reduce your vacancy rates is to market your rental unit as soon as you can. Your vacancy periods can depend on how well you market your rental property or if you're in a competitive rental market. Marketing expenses can include:

• Rental Listing Fees: There are plenty of rental websites and social media platforms that allow you to post rental listings for free, but some of the most effective features might be behind a paywall.
• Professional Photography and Video Tours: In addition to competitive pricing, you also need high-quality images and video tours of your property to attract high-quality tenants.
• Open House and Showing Costs: Time and resources are required to conduct property tours, and costs can increase if you hire professionals, such as property managers.

4. Operating Expenses

Operating expenses are where the true cost of vacancy can grow. Unlike marketing costs, some of your operating expenses can't be controlled. For instance, utilities remain active for safety purposes, such as security measures and environmental control.

There are also property taxes, mortgage payments, and insurance premiums. Insurance may seem like an unnecessary vacancy cost, but certain risks do not disappear when a property sits unoccupied. With risks like natural disasters or theft, vacant properties can still benefit from insurance coverage.

5. Property Management Costs

Some rental property owners do not have the time to market vacant units, which is where a property manager comes in. You will have to cover property management fees for marketing, tenant screening, leasing, or tenant placement costs.

That's not to say property management fees aren't worth piling on to vacancy costs. A competent property management company can reduce vacancy periods and research the local market to determine the best marketing strategies based on rental demand.

6. Property Deterioration

The longer a unit sits vacant, the greater the risk to your rental property. Not all vacancy costs are financial burdens. Rental vacancy rates can also affect the property itself.

• Increased Security Risks: Vacant rental properties are more vulnerable to theft or vandalism, and you can even encounter complex issues like squatters.
• Delayed Maintenance: Without renters submitting maintenance requests, your property can suffer from undetected issues like leaks, pest infestations, and system failures that can worsen over time.
• Potential Rent Reduction: To avoid prolonged vacancies, you should charge a lower monthly rent than market value or offer flexible lease terms to cover vacancy expenses.

Focusing on Tenant Retention

Some vacancies cannot be prevented, such as when renters relocate for a job. However, some are within your ability to mitigate. Maintaining your occupancy rate is the key to avoiding vacancy loss. By taking care of your existing tenants, they will also take care of you.

Real estate investors can tell you that retaining tenants requires fewer resources and effort than minimizing vacancies. Although San Diego's vacancy rate is lower than the national rental vacancy rate of 7.3%, it is still one of the most competitive markets.

If you have multiple units, such as an apartment building, you can calculate your economic vacancy rate and determine whether reducing vacancy is urgent. Economic vacancy rate measures potential rental income loss, which gives you a better picture of your cash flow.

To find your economic vacancy loss, deduct your actual rental income from your Gross Potential Rent (GPR), which is what you would earn by collecting monthly rent from all units when your physical vacancy rate is 0.

Rental Vacancy FAQs

Why are vacancies expensive for landlords?

• Vacancies reduce rental income while many property-related expenses continue. The longer a unit remains vacant, the greater the impact on cash flow, profitability, and overall return on investment.

What marketing expenses should landlords expect during a vacancy?

• Marketing expenses can include rental listing fees, professional photography, virtual tours, paid advertising, open-house costs, and other promotional efforts to attract prospective tenants.

How can landlords reduce vacancy costs?

• Landlords can reduce vacancy costs by retaining quality tenants, responding promptly to maintenance requests, pricing units competitively, effectively marketing vacancies, and minimizing turnover periods.

Why Hiring a Professional is Worth It

No one understands the true cost of vacancy better than a property management company with years of experience in the rental industry. They know how significant the impact of lost rent is and the hidden costs when a rental unit sits vacant.

Harland Property Management can handle everything from setting a competitive rent based on market trends to reducing vacancy rates to ensuring tenant satisfaction to avoid vacancy losses. 

With us, your entire portfolio can thrive, and you can remain stress-free.

Contact us, and let's arrange a plan that benefits your rental business.

More Resources:

Multifamily Management Tips to Boost Tenant Retention in San Diego

Emergencies Landlords Should Keep Cash Reserves For