ideal rent levels

[Yev]

Here is a (perhaps non-solvable) problem:

How do you determine IDEAL rent levels? Before you start suggesting market research, surveys etc. I`ll ask you to skip this and take it `one step further`.

Imagine two situations: you have an average property in an average town (for which CMHC publishes data). If you set your rents at HALF the CMHC rates - you will likely have 100% occupancy. If you set your rates at TWICE the CMHC rates - you will likely have 0% occupancy.

For this intellectual exercise we live in "Ideal Province" where you can adjust your rents up or down without any notice to tenants at any time (even daily...

)

So, what is the ideal rent level in order to maximize your income? Do you aim for CMHC rents and CMHC-like vacancy rates? or do you `push` your rents higher and have slightly higher vacancy, but maximize your rents?

(In case this seems like a simple problem - I should let you know that my wife, who is a PhD in Statistics is currently trying to solve this...)

I welcome all input

Thanks,

Yevgeni

 

[Thomas Beyer]

Assuming 0 costs to fix things when someone moves out, immediate re-occupancy and 0 marketing costs you keep rents slightly above "average".

Assuming at least one month vacancy on move out, $500 to $2000 to fix things and some marketing costs you try to reduce turnover and have rents slightly below average.

 

[David90]

Rental rate is only part of the equation. How well is the property maintained? What condtion is it in? What is the quality of the management. What additional benefits or services do you provide?

Renters are willing to pay more for a better property, or if there is a unique advantage to renting with you.

I try to maximize my rents by providing outstanding management, a quality well maintained product and quick response to service needs. Therefore I get above the market average rent. It`s all about how you sell yourself and your product.

 

[invst4profit]

My preference would be to push the rents higher. I believe this tends to attract a higher quality tenant which is generally more stable. With thorough screening along with better quality tenants you should have fewer turnovers which under this scenario, rent increases at will, is a win/win.

 

[Thomas Beyer]

let`s assume avg. rent is $1000.

Let`s assume avg. vacancy is 5%.

So net rent, on average, is $950.

Let`s assume rent is pushed 10% higher to $1100. Let`s assume vacancy goes to 10%. Average rent now is $990 ! i.e. OK to push rents up IF cost stay the same. They do not, as you have to advertise and repair a few things. So, a wash.

Let`s assume rent is pushed 20% higher to $1200. Let`s assume vacancy goes to 20%. Average rent now is $960 ! down from $990 but still OK to push rents up IF cost stay the same or if vacancy is only 10% due to great leasing agent.

Let`s assume rent is pushed down to $900 and 0 vacancy. Avg. rent is now $900 .. but no advertising or repair cost. Again, a wash .. with a slight advantage even as turn-over costs are easily $300-$500 !!

Thus, for a long term rental with a goal of CASH-FLOW: rents are kept slightly below market.

For a property with a goal of VALUE MAXIMIZATION, which is a multiple of the rent roll, rents are kept slight ABOVE market .. until sold or re-financed. Then we keep them slightly below market to reduce turnover, and thus, associated turn-over costs !

 

[realfortin]

QUOTE (thomasbeyer2000 @ Mar 4 2009, 08:48 AM) For a property with a goal of VALUE MAXIMIZATION, which is a multiple of the rent roll, rents are kept slight ABOVE market .. until sold or re-financed. Then we keep them slightly below market to reduce turnover, and thus, associated turn-over costs !

So in my case where one of my tri-plexes has 3 tenants at well below market rent, once they move out, decent cosmetic work done, rent it at average rent, until I near my exit plan for that property, then start making slightly better capital/cosmetic improvements, rent above market and sell the increased value building based on a nicer building and rent roll? Or should I still stay cosmetic?

Real

 

[Yev]

QUOTE (thomasbeyer2000 @ Mar 4 2009, 07:48 AM) let`s assume avg. rent is $1000.

Let`s assume avg. vacancy is 5%.

So net rent, on average, is $950.

Let`s assume rent is pushed 10% higher to $1100. Let`s assume vacancy goes to 10%. Average rent now is $990 ! i.e. OK to push rents up IF cost stay the same. They do not, as you have to advertise and repair a few things. So, a wash.

Let`s assume rent is pushed 20% higher to $1200. Let`s assume vacancy goes to 20%. Average rent now is $960 ! down from $990 but still OK to push rents up IF cost stay the same or if vacancy is only 10% due to great leasing agent.

Let`s assume rent is pushed down to $900 and 0 vacancy. Avg. rent is now $900 .. but no advertising or repair cost. Again, a wash .. with a slight advantage even as turn-over costs are easily $300-$500 !!

Thus, for a long term rental with a goal of CASH-FLOW: rents are kept slightly below market.

For a property with a goal of VALUE MAXIMIZATION, which is a multiple of the rent roll, rents are kept slight ABOVE market .. until sold or re-financed. Then we keep them slightly below market to reduce turnover, and thus, associated turn-over costs !

Hi Thomas,

This is the exact problem that I encountered while trying to solve this issue - i.e. how do you predict what the vacancy rate will be if the rents are 10 or 20% above `average`. It is possible that trial and error are the only way to find out the `ideal` situation, but I REALLY like your suggestion in terms of VALUE - Maximization vs. CASH-Flow. Of course, one always needs to keep in mind the changing rental market situation as one is attempting to apply these rules...

Thanks,

Yevgeni

 

[housingrental]

Yevgeni - I might be missing something but this modeling seems to be a time waster from any practical application perspective - Your result will depend on the data you use for the input - ie rent rates and vacancy assumptions - and these will always have material variances from actuals for any particular property at any particular time - so for other than course work why bother?

 

[Thomas Beyer]

QUOTE (housingrental @ Mar 4 2009, 06:13 PM) ...why bother?
.. because CASH-FLOW for long-term .. and VALUE MAXIMIZATION for short term upside for a re-fi for example should be treated differently .. and require indeed different levels of rental strategies !

of course, much variation among properties exist or what vacancy do you get with rents 50% or 4% over "average" ...