We want to take some time to go a little deeper into the importance of balancing your rental rate with potential vacancy loss in order to maximize income year in and year out. We preach to our clients the need to maximize the potential of their property and tenants, not the rent explicitly. Before we delve into some vacancy hypotheticals it is important to expand on this point further. By maximizing your property and tenants; you will as a byproduct do the same with your income. But it does not work the other way around. You cannot prioritize rental rate and have it lead to great tenants.
On-time rent payment and property upkeep is just as important as the yearly value in rent collected for your investment. If a property is priced too high, it may find tenants, but their ability to pay or pay timely may be affected if they are stretching their means to rent. To the same effect, getting a slightly higher rent each month could easily be negated if your turnover costs are more because the tenants did not care for the property. Also, great tenants at the right rental rate will renew year after year at the market increase. If you are overpriced to begin with, you will absolutely see more turnover and tenants that renew at a much lower rate.
But how can you know if you are overpriced and at risk for any of these scenarios?
If you are noticing any of these trends it is time to adjust down and get yourself back into the rental race. We realize not everyone has access to years of market data and rental trends so aside from checking local listings you can always use the ½ percent rule in DC. For mid-level product in DC that we have the sales price for- a good rule of thumb is to take ½ of 1% of the sales price to find your jumping off point. A $500,000 purchase at .005 is $2,500/mth and right in the range of pricing for the majority of rentals that sold at that price throughout DC.
Lastly, let’s take a look at how vacancy can affect your rental immediately and over time assuming a $2,500/mth property from the example above. You use the rule of thumb and arrive there and decide to price at $2,550/mth to list for a January 1st move-in.
Scenario 1: After weeks of little interest you stay the course and do not adjust. Eventually someone moves-in 2 months after the listing at $2,550/mth for a March 1st date.
Scenario 2: You realize the lack of interest and adjust to $2,400/mth and are able to place a tenant on the 1st of the year.
In scenario 1 you may have achieved a higher rate, but you have cost yourself 2 months of income equal to just under $5,000 in your first year. In scenario 2 you have a lower initial rent, but $150 over 12 months is $1,800 which is considerably less loss than you would have if you held out longer for the higher rent. Even if it only sat for an extra month and not two, you would still lose money every 12 months. Compounding that is the fact that renters composing the ceiling of any market are much less likely to renew and cost more to replace all while risking further vacancy loss.
As an investor each dollar counts so it is more important than ever to be able to strike a balance between the two.