The Property Management Occupancy Myth

"It's better to set the rent low and fill it fast, then set it at a high price and be vacant for longer." The money you lose from the apartment being empty is more than what you will gain from the higher rent. I hear this myth often. Some managers live by it. But is it true?

This myth has its roots with our early ancestors. We have a tendency to prefer avoiding losses over making gains. Psychologists call it Risk Aversion. Losing money is more painful than the joy of making it. In our primitive mind, they don't have equal value.

Risk Aversion makes sense from an evolutionary standpoint. Imagine you're a vulnerable primate, foraging for food in the African savannah. Perched high in a tree, you see a single low hanging fruit in a nearby plant. On your way down to get it, you spot two huge apples a short walk across an open plain. You're faced with a dilemma. Do you cross the plains risking death, or do you happily collect the easy fruit?

A 'fruit' in your hand is better than two in the bush. Our ancestors decided to eat the low hanging fruit. It's better to eat what you can get easily, then to take risks. Besides, you'll find more fruit later.

This strategy works well. But real estate investing is not fruit picking. Using the same approach costs you money.

The critical flaw in applying this strategy to real estate is that it fails to account for value gained over time. You see, the same fruit was not coming in monthly. If it did, taking one risk to gain double the fruit for life would have had a drastically different affect on our psychology.

We have to use a method that accounts for income over time. Let's use an example. Renting an apartment for $500/month for 2 years is $12,000 in income. If we increase the rent to $750 and the unit is vacant for 6 months the income is $13,500. Even though the apartment is only occupied for 18 months, it's at a high enough rent to compensate.

So how much time can the apartment stay vacant for and still earn the same money? For an accurate answer, we need to do a little math. Write a formula expressing the relationship between incomes and time. R1xMths = R2x(Mths+t). Solve for the extra time. ((R1/R2)xMths)-Mths =t. And then input our example ((500/750)x24)-24=8. So, if you rent the apartment for $750 instead of $500, it can be vacant for 8 months and still break even at the end of 2 years.

Play around with the numbers for your situation and see what happens.

Deciding on the right rent is ultimately a judgement call. There are many other factors to think about in setting rents. But don't dismiss higher rents out of hand because they may increase vacancy. Your strategy should be to maximize income, not occupancy.


Paul_Del_Franco

Enter your email address:

FeedBurner

Related Post :