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Turnover - the hidden cost.

The most ignored or misunderstood factor of purchasing, appraising, financing, and developing real estate is apartment turnover. For a manager of multifamily properties, turnover is the single most important variable in maximizing net operating income.

If an investor is considering purchasing an existing 250-unit apartment community based on a 95-percent economic occupancy today, he or she is seeing only half the picture. Because apartment occupancy is often cyclical, occupancy figures for at least two years must be evaluated to get a true picture of vacancy and income.

Figure 1 illustrates that turnover may be 6 percent in one month and jump to 11 percent in the third month. Thus, a goal of 20 new rentals per month, which would keep the property at 95 percent occupancy during May and June, would let occupancy fall below budgeted goals in July and August. Thus, in projecting turnover, it is vital to study any cyclical TABULAR DATA OMITTED patterns in moveouts and adjust the monthly goals accordingly.

Nor is it safe to assume that turnover and vacancy will be eliminated by good management. While competitive rates and a well-run property are definite pluses in reducing turnover, factors such as market conditions are difficult to control. Personal factors also influence turnover. A recent study indicated that 33 percent of moveouts were purchasing homes and 40 percent had been transferred or were otherwise moving out of the area. Only 13 percent moved to another apartment in the area.

Turnover costs

As you know, turnover can be costly. Figure 2 shows the average direct cost associated with a vacancy. Indirect costs such as advertising, rental concessions, and administrative work are not reflected. Obviously, these costs are variable and may be higher or lower in your properties.

The average turnover cost is $321. While the security deposit will cover some costs, others such as electrical and perhaps even carpet cleaning and painting must be assumed as an expense of leasing. Clearly, turnover is an expensive proposition.
Average Cost of Turnovers
Maintenance to repair
apartment (3 hours at
$12 per hour with benefits) $ 36
Materials for repair 35
Clear unit (5 hours at $9
per hour with benefits)
and materials 60
Shampoo carpets
and drapes 80
Paint (5 hours at $10
per hour with benefits)
and materials 120
Electricity while vacant 25
Total $321
Figure 3
Impact of Turnover on NOI
Assumptions: 250 units at an average rent of $615, average
absorption of 16 apartments per month, budgeted turnover rate
of 6 percent and vacancy rate of 5 percent, operating expenses
of $2,600 per unit per year. For the purposes of this example,
other income and delinquencies are not factored in.
Month 1 (Turnover of 8%
 or 20 apartments)
Gross rent potential $153,750
Less: 5.0% vacancy (7,687)
Effective income 146,063
Less: Expenses (54,166)
NOI $ 91,897
Month 2 (Turnover of 6%
 or 15 apartments)
Gross rent potential $153,750
Less: 6.2% vacancy (9,532)
Effective income 144,218
Less: Expenses (55,771)
NOI $ 88,447

Turnover's impact on NOI

Even more significant than the expense incurred because of turnover is the loss in income and value. As Figure 3 demonstrates, even one month of higher than average turnover may easily impact vacancy and thus NOI.

In this example, only one month of higher than budgeted turnover decreased NOI by $3,450, or nearly 4 percent. If turnover had remained high in Months 3, 4, and 5, results would have been far worse. Also, skips and evictions may make overall turnover figures higher.

And even if increased marketing efforts do enable a property to offset higher turnover, it will still be difficult to move in these new rentals in time to avoid further economic loss.

Preventing turnover with retention

Because turnover is so expensive to the property, resident retention should become the manager's principal focus. A 1991 study by For Rent magazine found that 57.1 percent of apartment residents decide to move up to 12 weeks prior to lease expiration, so renewal programs should be started at least 90 days prior to move-out date.

Even more importantly, efforts to retain tenants must be ongoing from the first day of residency. Social events, a newsletter, prompt maintenance service, and a friendly, professional staff are all vital elements in ensuring that excessive turnover does not occur.

As managers, our responsibility is to maximize the NOI of investment property. Minimizing turnover, by taking care of residents one day at a time, will help ensure that turnovers do not exceed what the community is able to absorb in new rentals.

Factors Influencing Apartment Turnover

Several factors may influence the current and historic turnover of apartments:

* Unit mix. To minimize turnover, a property should have no more than 40 percent one bedrooms and studios and no more than 25 percent three-bedroom units. Tenants in one bedrooms tend to be more transitory, and rental rates for three-bedrooms tend to compete with home mortgage rates, especially in this period of low interest.

* Lease term. Month-to-month leases invite higher turnover. If at all possible, sign the leases for a minimum of six months.

* Economic conditions. Projects for job growth, new construction, interest rates, and unemployment in the area will all affect turnover trends.

* Resident profile. Turnover may also be affected by layoffs and firing. If possible, avoid having more than 30 percent of your residents working in the same industry.

* Rent levels. The higher the rent level, the more vulnerable a property is to economic conditions. In tough economic times, consumers may decide to get by with less.

Patrick J. Welton, CPM |R~, is president of Premier Management Company, Inc. in Seattle. The company manages 8,000 apartment units in seven states.
COPYRIGHT 1993 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:costs of apartment turnovers
Author:Welton, Patrick J.
Publication:Journal of Property Management
Date:Jan 1, 1993
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