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The higher rent lower income paradox

Thursday, April 5, 2012

Many investors embarking on leasing out their first rental property hold out for the highest rent possible before letting the property, thinking the sky is the limit in a competitive rental market. Many do this even if this means losing several weeks rent. What does this mean for their overall return on the property?

Experienced property investors report that the best way to maximise the return on their investment properties is to keep the property let – in other words to mimimise vacancy. But it is not always easy to decide to lower the rent. It is tempting to hold out for “just another week” and before you know it, another one goes by. But experienced investors say that doing the sums shows that holding out for a high rent is counter-productive; if the property is never going to let for $400 a week anyway, losing $350 for even two weeks is $700 that, spread over a year, will lessen the overall weekly return to less than the $350 the property will actually eventually be leased for.

Furthermore, tenants talk to other people in the rental market and those paying top dollar are the first to notice a downturn in the rental markets, often reacting by moving out to a cheaper property when their lease expires – a further opportunity for vacancy while the landlord chooses again to go for top rent before accepting the changed circumstances. Higher turnover of dissatisfied tenants is a further opportunity for lost income.

Experienced property investors aim for long term occupancy by asking for realistic market value, thus avoiding tenants moving to greener pastures when the rental market slows down. And when they do have a vacancy, they work by the rule that (provided the property is clean and presents well and is well-maintained) if a tenant is not secured by day ten of the leasing campaign, the asking rent should be reduced by ten percent.

This takes the agony our of the decision, enabling the property owner to distance themselves from the process by working to a tried and tested system.


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