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.
Have questions or want to work with an experienced real estate team on purchasing or managing investment properties? Contact us at 214-227-6626.
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