What is Tenant Turnover?
The Tenant Turnover Rate represents the percentage of existing occupants at a given property that decide to vacate their unit at the end of their lease term.
What is the Tenant Turnover Rate?
The tenant turnover rate, or “rental turnover rate”, is a real estate metric used to measure the percentage of existing occupants at a property, such as a residential building, that vacated their units at the end of their lease terms.
Since the vacant units are now unoccupied by tenants, the property management company – i.e. the owner of the property – must quickly replace the former tenants to avoid the risk of lost rental income.
Otherwise, the vacant units will not generate any rental income on behalf of the property, resulting in a reduction in pro forma rental income.
The tenant turnover rate quantifies the proportion of existing property tenants who decide not to renew their lease and move out.
It is important to track the tenant turnover rate because tenants collectively deciding to move out, rather than renewing their leases, can often bring attention to potential issues within the property that can be fixed (“red flags”).
What is a Good Tenant Turnover Rate?
For instance, a property could be trailing nearby comparable properties in terms of quality (e.g. amenities, staff), which the property owner can identify and then renovate or repair the units to reduce the tenant turnover rate.
For real estate investors and property owners, the priority for rental properties is to generate stable, predictable rental income, which cannot be achieved if existing tenants are continuously churning (i.e. leaving).
- Low Tenant Turnover Rate – More Stable, Long-Term Income (Less Risk)
- High Tenant Turnover Rate – Less Stable, Unpredictable Income (More Risk)
With that said, the rate of tenant turnover must be reduced as much as possible to incentivize more lease renewals for the sake of producing more consistent, long-term income.
How to Reduce Rental Turnover Rate
The rental turnover rate can be reduced using several methods, such as the following:
- Adjust Rent Price to Market Rate (or Lower)
- Property Repairs and Renovations
- Upgrade Amenities and Other Property Features (e.g. Modern Gym, Improved Building Security)
- Reduced Pricing for Lease Renewals
- Offer Incentives (e.g. Free Months)
How to Calculate Tenant Turnover Rate
Computing the tenant turnover rate of a rental property requires two inputs:
- Number of Vacancies, i.e. Tenant Non-Renewals
- Total Number of Units Available in Property
The standard time frame used to determine the tenant turnover rate is one year since a twelve-month lease is the standard for the residential real estate market.
The number of vacant units at lease-end divided by the total number of units in a property over a given period results in the tenant turnover rate.
The total number of vacant units must be inclusive of all tenants who decided to move out, irrespective of whether a new tenant replacement has been found.
Note: Since lease start dates are rarely the same for all tenants, adjustments to standardize the dates are often necessary.
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The formula to calculate the tenant turnover rate is the ratio between the number of vacated units and the total number of units over a given period.
To convert the tenant turnover rate into a percentage, the output must then be multiplied by 100.
For example, if a commercial building has a total of 10 units available for rent and 2 of the units were vacated at year-end, the tenant turnover rate is 20%.
- Tenant Turnover Rate (%) = 2 ÷ 10 = 20%
In our hypothetical scenario, the property owner must find replacement tenants for the now 2 unoccupied units, which will produce no rental income until replacement tenants are secured.
The more time between the date of vacancy and occupancy, the more losses are incurred in potential rental income.
Tenant Turnover Calculator
We’ll now move to a modeling exercise, which you can access by filling out the form below.
Property Tenant Turnover Rate Calculation Example
Suppose a real estate property owner is calculating the tenant turnover of a residential building in 2022 relative to the prior period to determine the effectiveness of the strategies implemented to improve tenant retention.
The residential building has a total of 125 rental units, which remained unchanged from 2021 to 2022.
- Total Number of Rental Units = 125 Units
For illustrative purposes, we’ll assume that all tenant leases are one-year rental agreements that end on December 31.
In 2021, the number of vacancies was 25, whereas the number of vacancies was 20 at the end of 2022 in comparison.
- Number of Vacancies, 2021A (Non-Renewals) = 25 Non-Renewals
- Number of Vacancies, 2022A = 20 Non-Renewals
Thus, the number of non-renewals at lease-end among tenants dropped by 5 year-over-year (YoY).
The tenant turnover rate of the residential building can be determined by dividing the vacancies by the total number of rental units.
- Tenant Turnover Rate (%) – 2021A = 25 ÷ 125 = 20.0%
- Tenant Turnover Rate (%) – 2022A = 20 ÷ 125 = 16.0%
- Differential (%) = 20.0% – 16.0% = 4.0%
In conclusion, the reduction in the tenant turnover rate by 4.0% – an improvement from 20.0% to 16.0% – implies the tactics employed by the building property owner to incentivize lease renewals were, in fact, effective.
