As a property manager I often have this conversation with my investor clients. I understand trying to get the most possible cash flow out of a property but this has to be tempered by two issues--occupancy rate and quality of tenants.
You might ask, “How are they related?”
In part one, I’ll discuss occupancy rate.
Occupancy Rate is defined as the amount of time a property is rented over a period of time. If your rental is vacant for one month out of the year you have an occupancy rate of 91.6 percent. You arrive at the occupancy rate by taking the time the rental is occupied and dividing it by the total time available.
As an investor you should never plan on a 100 percent occupancy rate. We typically use 85 or 90 percent just to be conservative in our approach.
If your rental list price is set too high the property will sit vacant for a longer period of time. Let’s assume you have a rental unit that would quickly rent for $1500 but you list it at $1600. If it takes you an additional 30 days to find a tenant willing to pay $1600, you actually lost $400. What?
While the $1600 rent generates an additional $100 in monthly revenue, you lost $1500 for the month the property could have been rented at the lower price. So, over the course of a year you generated $1100 in additional revenue but lost $1500 due to the vacant month. This results in a loss of $400 during the year!
A higher rental price is usually only profitable if you can rent the property in a similar amount of time. Otherwise you typically wind up losing money.
In part two, I’ll discuss how rental price also impacts the quality of tenants.
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Originally posted at http://www.thebranchteam.com/wordpress/2012/01/19/investors-do-you-really-want-the-highest-possible-rent-part-1/
Tom Branch and Gina Branch, The Branch Team with RE/MAX Dallas Suburbs, service the greater North Dallas suburbs including Dallas, Plano, Allen, McKinney, Frisco, Lewisville, and Carrollton. While Gina concentrates on traditional listings and buyer/tenant representation, Tom specializes in assisting distressed homeowners to avoid foreclosure. Tom and Gina have published two books (Achieving Rock Star Status and The Field Guide to Short Sales) and are available for speaking engagements in the greater Dallas - Fort Worth Metroplex. Subscribe to The Branch Team Blog.
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Ditto * they can pay me 2X to lease the home to the second set of residents who don't work out OR, rent or extend the lease to the current residents when I increase the rent to one-half of what a new tenant would pay.....move-in/move-outs create wear and tear and THAT is EXPENSIVE
Excellent points. I am working with an investor with this right now. I think I will send him your post.