Myth: A twelve month lease means twelve months of rent
When is a year not a year? When you're moving. For tenants and landlords dealing with moving and vacancies, the year should not be calculated on a 12 month basis. In fact, from a moving perspective you should be doing some mental calculations every time you think about rent rates.
The true math for tenants
Let's start with the tenants first. Your magic number should be 15, and when you look at any rent rate, multiply it in your head by 1.25 in order to figure out the real cost to you in your first year. Why? Well, in addition to the rent that you will be paying out, here's where the extra three months go:
- Security deposit - minimum 1 month of rent. While this is supposed to be given back to you after you leave, you'll still have to come up with it somehow.
- Actual moving costs and time lost from work - about 1 month of rent. Chances are if you're moving you will need to buy or rent boxes, pack up, hire movers or at least a truck. Throw in time lost from work for moving day or to recover from injuries sustained while moving, and you've got pretty much another month's rent in payouts and lost income.
- Fees to get set up in your new place plus odds and ends to adapt your life - about 1 month of rent. Those "just moved" trips to Target and Ikea add up. The utility companies want a piece to transfer service. In condo buildings there will be move-in fees, sometimes to both the property manager and the board.
So, tenants, if you're moving into a $1000 apartment, you need to think about the first year as more like $1250 per month.
The true math for landlords
On the landlord side of things, the first year of a lease is more like somewhere between 9 and 10 months. For the sake of planning cash flow you should not anticipate earning more than 9 months of rent every year, and estimate net rent as more like 75% of the amount that is written on the lease.
Here's where it goes if you're a landlord.
- Vacancy - 1 month. Unless you're a whiz at turning over apartments, you will probably lose a month to vacancy after your old tenant moves out. Even if you manage to get the place cleaned up and market-ready within the first week, you've already lost your chance at a full months' rent, and you'll probably spend more to get the rush job finished than you would if you just took your time and went for quality work.
- Commissions - 1 month. Unless you are able to perform background checks, attend showings, gauge the right rent rate for the market and monitor advertisements on multiple different websites, you should really be using an agent to rent out your apartment. Those who are still relying on signs in the window in this day and age are missing a huge portion of the potential market, and those who are not performing background checks are exposing themselves to the renters that were rejected by all of the landlords who do their homework.
- Tools and supplies - 1 month. At a minimum you will need paint, carpet, blinds, window screens, light bulbs, batteries, towel bars, and the tools to install all of the above. Apartments in Chicago need new locks as well, thanks to legislation effective Jan 1, 2012. If you've got a fireplace you'll want to get the chimney cleaned, and if you've a in-unit dryer you'll want to have the vents cleaned. In-unit furnaces also need a good clean out and filter change. If you aren't handy with tools you will need to hire someone to do the work as well.
So landlords, if you're looking to cover your mortgage and utilities for a year you should set your rent rate at least 1.25 times over the amount you need per month to be on the safe side, provided the market will bear that cost. I should note though, this does not mean you can increase the rent by 20% every year on your tenant just because you know it will cheaper for them to stay than it would be for them to move. After all, there's no benefit in raising rent to $1170 when similar apartments nearby are renting for $975.
Have you figured out ways to save money when it's time to move? Share them with the rest of us in the comments!