Reduce the rent if necessary
As we have mentioned, one of the things that affects your cash flow (and therefore your returns) the most is property vacancies . Although we do our best to ensure any vacancy falls within a peak rental period, unforeseen circumstances will sometimes result in vacancies at a less than optimal time of the year. If this happens, we must ensure that your property is tenanted as fast as possible for the best rent possible at the time. This can mean reducing the rent by a small amount. Too often, owners refuse to reduce the rent in order to entice a tenant to lease the property, resulting in extra unwanted weeks of vacancy and completely blowing out the yearly returns. Here’s an example to help you understand the maths:
“Mark has an investment property rented out at $400 per week when the tenant has a family emergency, breaks the lease, and decides to vacate the property at a time of year when it is harder to find a tenant. After recouping losses through normal channels, CQ Executive Properties advises Mark that we believe it would be better in the current environment to advertise the property at $390 per week on a twelve month lease, building in a $10 rent rise after the first six months back to $400 per week. We believe it would attract a suitable tenant quicker, resulting in a minimal vacancy of probably only one week.
After due consideration, Mark decides to instruct his property manager to advertise the property at $400 per week as he wants to maintain his previous yield. After four weeks on the market, conditions improve slightly and Mark successfully re lets his property at $400 per week on a twelve month lease.”
On face value, it would seem that Mark has made a good decision as he now has his property let for twelve months at $400 per week, instead of $390 per week for the first six months. However…
By insisting that the property be let at $400 per week, it resulted in four weeks vacancy in a fifty six week period (the four weeks vacancy plus the eventual fifty two week lease), looking like this:
- four weeks vacancy, followed by;
- fifty two weeks of $400 per week rent.
(4 x $0) + (52 x $400) = $20,800 gross return
If Mark had followed CQEP’s advice, in the same 56 week period, Mark would only have had:
- one weeks’ vacancy, followed by;
- twenty six weeks of $390 per week rent, followed by;
- twenty six weeks of $400 per week rent;
- the remaining three weeks in the defined fifty six week period either relet at $400 per week or even raised again to $410 per week! Let’s assume the worst case of a renewed lease at $400 at the end of the period.
Therefore the total return would be:
(1x$0) + (26 x $390) + (26 x $400) + (3 x $400) = $21,740 gross return
The extra three weeks vacancy that resulted from not reducing the rent a mere $10 per week ended up costing Mark $940 in gross rental return! The lesson here is that it is better to reduce the rent if necessary by a small amount quickly and secure a tenant as soon as possible, rather than having weeks of vacancy whilst trying to hold out for the rent you want.
Even a week of unnecessary extra vacancy can result in a total cash flow reduction that far exceeds the total return from a lower weekly rental amount. This is always within reason of course, as depending on timing, vacancy rates and market demand, it may still be possible to obtain the rent you want immediately.
Most property managers will tell you that they will get you the most amount of rent; however, as you can now see, this is not necessarily the correct way to approach it. At CQ Executive Properties, we understand that maximising the rent is important, but not at the expense of achieving the best overall rental return. Above all, try to always follow the “advice of the market” – it never lies!