The ultimate goal of rental property management investment is to return more money than what you pay out. The normal reaction to choosing rental price is to maximize it to get the most rent. But according to some rental property experts, doing so may actually cause you to lose more money.
About 99% of real estate investors and property management professionals in believe in maximizing rents as the most important steps towards increased ROI. This could not be further from the truth, as this tactic is the exact opposite of what should be done to maximize your ROI or return on investment.
Reasons Why Higher Rents May Decrease your ROI
It’s rather tempting to put a higher rental price tag on your properties so you can get a faster return on your investment. But then again, you should also consider a lot of other factors, before you go that route. Here are some of the other things that you must consider:
- Vacancy rate
Vacancy is the number one expense of a rental property. Most rental properties spend 28 days vacant each year. That is one months’ worth of rental of income and it creates a high negative hit against your ROI. The higher the rent, the longer a unit will sit vacant. Even if your properties only sit for three weeks, that’s still a killer to your bottom line.
- Lower tenant discretionary income
Higher rents can consume a higher proportion of the tenant’s discretionary income. This could increase the risk of default if the tenants’ income is interrupted. Even a high medical bill or car repair could lend risk to a tenant missing a payment.
- Attracting the wrong types of tenants
Good tenants are frugal and fiscally sound. They budget their money, look for good values, and plan carefully. They search and look for good values and appreciate it when they find one. Tenants who are overstretched and not fiscally sound will reach and overspend. They make sudden and impulsive purchases. These trends do not stop when finding a rental home or when they secure their own homes. They are more likely to make financial mistakes that hurt their chances of making on-time payments.
Ultimately the goal of any rental property investor or property management professional is to find quality tenants without comprising your bottom line. Lower rent with a higher value can attract great tenants and keep them.
Why Hire Property Management Companies
To keep your rental business sound and successful, you need a team of experienced property managers to help you build, run, and improve your business. First-time real estate investors who don’t know the first thing about property management and rental rates should seek the help of professionals if they want to keep their rental business afloat in the next few years. It’s not easy to manage a rental home on your own, especially if you don’t have the knowledge, training, skills, and experience needed for the job.