When the rental market is great it’s easy to look past what may be your two highest expenses when you own rental real estate. You may not even have these expenses when the market is really good. However, over the long term these will creep up on you and when they hit it can be catastrophic to your cash flow. If you haven’t prepared appropriately it can actually bankrupt you.
Your two largest expenses for rental real estate are generally going to be vacancy and turnover costs. Every month you do not have a rent check coming in is vacancy. You will still have money going out though for your mortgage (if you have one), property taxes, utilities, lawn care, etc. Every time a tenant leave and you need to have a new one come in, you have turnover costs. Usually that includes paint, carpet, replacing broken items, etc. Your biggest turnover cost is actually the vacancy costs associated with the turnover. The prior tenant leaves then you need to find a new one so it could be empty a couple weeks or a couple of months, depending on the market and what types of repairs are needed. Keep in mind seasonality issues as well. If you have a tenant break their lease early and it’s November 14 you may not get a new tenant until January. Also, keep in mind you could have a situation where you need to evict. Then it can be a very long process that it takes to get them out of the rental and keep in mind you aren’t getting paid rent and you have outflow for legal and court costs.
For all these reasons, I encourage anyone that is buying a rental property to maintain cash in savings for at least 3 months but preferably 6 or more months of expenses you would be paying even if the property is vacant. That way you aren’t stressing too much when the vacancy and turnover costs come.