We understand the desire to maximize rental income as much as possible to increase the potential ROI on a rental property. But sometimes, waiting and allowing a rental to sit without rent while waiting for the highest possible rent, actually drastically decreases the ROI over time.
Now decreasing the rental rate prior to making sure everything else is in check is also not advised. We must always follow the law of the 4 P’s when making our decisions.
- Presentation. Is the rental in the best possible condition and is being presented very well through high quality photos?
- Placement. Is the rental on all the best possible advertising sites maximizing its exposure and is the rental ad compelling and attractive?
- Pets. Does the rental allow for pets as 75% of all tenants have a pet of some kind? (If not, that’s ok and the rent rate may need to adjust for this)
- Price. Lastly, is the price competitive with other comparables based on the previous 3 P’s and current market condition?
If all the P’s are in line, then we must get competitive with the price or at a minimum offer concessions to help it rent quicker and avoid vacancy.
Here’s an example of an actual situation from the perspective of Collin from our leasing team:
I had an experience renting out a home for a client where they learned the hard way the truth about renting out a property and how much it costs to overprice the property over just 1 year.
This client had a beautiful newly built home in a booming neighborhood. The client wanted to get the maximum profit out of his property possible and he believed that was by getting a high rent amount.
We gave our suggested rental price with a rental analysis showing why we suggest that price but the client was insistent on trying for a much higher price.
We recommended starting at $2300 a month and the client wanted to try $2800.
We let the client know we can try the higher price for 7 days and will then need to lower if we don’t have the interest needed to rent the home.
7 days later we had 1 click on the property with 0 showings. We sent the client the info and they insisted on trying for $2700 for another week. The same thing happened. We lowered and got 1-3 leads. Eventually people started calling and asking if we would consider lowering the price.
After a 6 week vacancy the client agreed to lowering to $2350 Two weeks later we had a tenant secured. The client ended up having a 63 day vacancy.
Now let’s look at the numbers.
Client wanted to get $2800 a month which in theory would have gotten them $33,600 income. That would be pretty good if it were feasible. In reality the owner had to lower their income to $28,200 potential earning over a year. Then on top of that they had the vacancy costing them an additional $5800 bringing their actual income down to $22,400 over 1 year.
Now let’s see what the income would have been by going with the recommended amount from the beginning. Total potential income would be 27,600. At this price we know we would have rented it in 2 weeks or less since we actually did it for 2,350 a month. So at the 2,300 we have a max vacancy of 14 days. The vacancy cost here would only be $1,074 bringing down the actual income to $26,526. This is over $4,000 dollars more than what the client actually will get due to the cost of overpricing their property.
In summary the truth about trying to get a higher rent price actually gets you less money over a year due to vacancy. Vacancy is the biggest ROI killer. Getting a more conservative rent amount and lowering vacancy time will actually earn you more than trying to get the highest rent on the block.