I was astonished to hear these words coming from a seasoned investor – somebody I respect a lot. “I need to rent the place for at least $1,200,” he said. “I won’t rent it until I can get at least that.”
The rental unit in question had been sitting vacant for about six months. It wasn’t that the rental market was completely dead, although it was… sick. (We’re talking South Florida within the last year.)
My friend’s fundamental error…
No matter what you’re marketing, “I need this price” is not an effective selling argument. The prospective customer does not care, nor should he care, about what you “need.” He only cares that the product is a good value for him.
That does not mean that somebody won’t eventually rent the place for the rent you need. Just recognize that you may be waiting for a while. And while you’re waiting, do some calculations to figure out the net effect of your waiting. Every month your unit is vacant, you get $0. Let’s compare two identical units, one offered at $1,200, one at $1,050. Unit One sits for six months before being rented; Unit Two sits for three months.
|Unit One||Unit Two|
|Total Rent After Six Months||$0||$3150|
|After One Year||$7200||$9450|
|After 18 Months||$14400||$15750|
|After Two Years||$21600||$22050|
|After 27 Months||$25200||$25200|
Unit One does eventually catch up to and start delivering better returns than Unit Two if, and this is a big if, each of the original tenants stays for at least two years. Unfortunately, in this rental environment, that’s pretty unlikely. When the tenants move out, the units are back on the market, and the pattern will repeat.
…and why he made it.
Like a lot of people, my friend has been hit hard by the economy, and doesn’t really want to keep losing money. He could even be described as a bit desperate, although he is far from broke. He feels like he’s broke, however, because he’s lost a significant percentage of his wealth over the last 18 months.
This mindset is actually very fairly common right now. There are also a lot of people who are desperate because they really are going broke. They are looking for ways to stop losing money, and to start exerting some control over their situations.
Getting $1,200 per month for his rental unit wouldn’t completely stop my friend’s financial bleeding, but it would help. His expenses for the unit run more than $1100 per month.
The answer is…
There are almost certainly ways for my friend to make more money from his rental, though they may not involve getting the higher rent he “needs.” Maybe he can reduce expenses. If he gets his monthly expenses, including the loan payment, down to $1,000 per month, he can make money by charging just $1,050 per month.
For many landlords, of course, the loan payment is the big expense, especially if they bought during the boom. (Never mind that the loan payment, except for an interest-only loan, is not a pure expense. Part of the money goes to equity – reducing the balance of the loan. My friend’s problem is cash flow, pure and simple.)
He can still reduce expenses with a loan modification program or refinance.
Alternatively, he can look for ways to increase the value of his rental. Can he make the rental unit more attractive to prospective tenants? In other words, he’s got to change his mindset and forget about getting what he “needs.” What he really needs is to make the rental unit worth the money he would like to get.