An Overpriced Property = High Risk and Lower Returns
"Every week a property sits vacant, there is a 2% loss of the total potential annual rental income. You can write off expenses; you can't write off lost rent. Price your property properly and start the revenue stream." - Michael Francis, Broker
Our 33 plus years of property management experience has consistently shown that testing the waters with a high rent price is a bad approach to getting the property leased. It is better to slightly underprice a property and rent it more quickly than to try and maximize the rental income but have it take longer to rent.
Example #1: Your goal is to maximize your rental income, you think you can get $1,500/month for rent. The property is leased in 60 days.
Rental Rate: $1,500/month
Time Vacant: 2 months
Annual income: $1,500/month x 10 months: $15,000
Expenses: Water, electric, landscaping for two months $ 330 (or more in the summer)
Annual Net Income: $14,670
Example #2: Your goal is to rent the property quickly, so you sacrifice $100/month in rent and advertise the property at $1400/month. The lower price increases the demand for the property, and is rented in 30 days:
Rental Rate: $1,400/month
Time Vacant: 1 month
Annual income: $1,400/month x 11 months $15,400
Expenses: Water, electric, landscaping for one month $ 160
Annual Net Income: $15,240
By reducing the rental rate $100* a month you have to increase your annual net cash flow by $570.00
Our leasing experience has shown:
- Renters are not buyers; what this means is they typically don't make an offer on a property and try to negotiate. If the lease rate is what they want to spend, they will look at your property. If the property is over-priced compared to the others in the area that they are looking at, they won't look at your property.
- As a property sits empty, the Days on Market (DOM) number on the listing in the Multiple Listing Service (MLS) keeps going up. As this number increases, the listing gets stale, agents and tenants then begin to think there's something wrong with the property.
- A property that sits vacant is at a higher risk for the potential of unintended damages (unattended broken water pipe, vandalism,...). In some cases, improperly insured properties may not be covered by your insurance policy after a certain number of days vacant. Call your insurance agent to find out how long your property can be vacant without coverage dropping.
- Leasing agents search for lease listings based on what their client wants to spend. If your price is too high, the property won't come up in their search. The agent knows what an average rent for the area is, and if it's overpriced, it won't get shown.
- With all of today's internet access, tenants do their homework on lease rates. Tenants know what property should lease for, and they know what they want to spend. If you're overpriced, chances are it won't get looked at.
- Keep in mind that while a property is vacant and no rent is coming in, you're making the mortgage payment with no rent to offset that cost.
How did you arrive at the lease rate?
We perform a Market Lease Rate Analysis through the MLS system to set the proper lease rate; the analysis is based on:
1) What is the current lease rate for properties that are similar to yours in the area?
2) How does your property look compared to the features of other properties? Is it updated? Is your property old and tired? These affect the lease rate.
3) How many properties are on the market, and how long have they been on the market?
4) What's the average Days on Market for the area? What has leased in the last 30 to 60 days?
The rate is then set based on these variables, and the property manager's experience. We want you to be successful, get the best tenant possible, the best rent as quickly as possible, and the best ROI.
Remember, an A grade tenant won't typically rent a B grade property or an overpriced one. We both want the best tenant to lease your property!
* The $100 is for example purposes. Sometimes a simple $75.00 to $50.00 adjustment is all it takes, especially if we're going from something like $1,525.00 to $1,495.00. This minor adjustment opens your property to people who don't want to spend more than $1,500.00 a month and who otherwise wouldn't have seen your property.