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Landlords Take Note, Less Is More
Whether you rent a single home, a duplex, or an apartment building, you most certainly want to maximize your revenue. Owning property gets expensive, and by the time you total expenses, there often isn’t much left over for your efforts. However, the knee jerk reaction to raise the price of the rental to its maximum value is not always the best choice.
Currently, in the Upper Keys, the rental market is softening as more and more rentals are staying vacant longer between tenants. Some people have been priced out of the market, and have decided to leave. Personally I know 4 families that have left, citing the cost of living as just being too high. I have heard tell of many more. Another reason these properties are remaining vacant longer is that owners are pricing higher, and holding out for a “better” tenant, assuming that someone who can “afford” the more expensive rent would be a more reliable, more responsible tenant. I have also noticed that vacation rentals for 2017’s high season are also seeing a higher vacancy rate than normal for this time of year.
The overall message to pay attention to? People vote with their feet. Especially with annual rentals. When you see people going to the extreme of exiting the marketplace because the cost of living is too high, you can be pretty much assured that there will soon be some price corrections. With a projected lower occupancy rate in vacation rentals, something is happening. And while the lower number of vacationers renting homes may be contributed to the uncertainties of the past presidential election, it certainly doesn’t explain annual rentals slowing.
Now that I have depressed you, I have some good news. People will always need a place to live, and rentals are in high demand. But the disparity in demand between higher-priced rentals and lower-priced rentals has grown larger. The explanation is simple, if you regress back to the supply and demand lectures from your high school economics class. You may recall that a higher demand can lead to higher prices; what you might not remember, are the two terms “elasticity” and “opportunity cost”. Stick with me, I’ll keep the dry and sciency bit brief.
Price Elasticity of Demand – If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes) Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in the quantity demanded.
Opportunity Cost – A benefit, profit, or value of something that must be given up to acquire or achieve something else.
As this relates to your bottom line. If you were to charge a lower rent, say $2,000, your annual revenue would be $22,000 (if it took a month to find a suitable tenant). However, if you went with the higher price and found a tenant at 4 months, your actual revenue after opportunity cost would have been roughly $17,350. That’s leaving ~$4,650 on the table. In this example, opportunity costs factored in were vacancy, electric, water, and advertising expenses. That 4 months without a tenant really adds up to a loss that the extra $400/ mo. cannot make up for.
Elasticity measures the effect price has on demand. At $2,400 there may have been a few tenants in line, but at $2,000 there were many. In this example there is a higher elasticity of demand, and demand in the upper keys has certainly become more elastic as people seem to be making choices that place a higher emphasis on price.
One thing that is often overlooked in the rental market is goodwill. For example, if you were to price your rental more reasonably, most tenants would place more value their lease. Rent may not be excruciatingly painful. As such, they may be more likely to ensure they were able to stay in the rental by; paying on time, as well as taking better care of the property. Should a tenant feel like they are being taken advantage of; they may end up moving out early, paying rent late, and end up caring less for the state of the property. Should they find they cannot afford the rent, and have nowhere else to go, eviction can be a very costly and time intensive process for a landlord. With a lack of lower priced rentals, people who need a place to live may take on something over their budget range.
For your financial and mental wellbeing as a landlord, a sound policy is to price your rental property appropriately within the market. With good tenants there may be a small loss, but with bad tenants the loss can devastate your bottom line. I am not advocating for reducing the price point to an unreasonably low level, just not pricing it unrealistically high.
Pay attention to what your property manager is saying, and the results they are getting. It’s time to stop listening to those who promise more than they can deliver, they waste your time, and it effects your bottom line. This applies to sales as well, reasonably priced properties sell, overpriced properties sit. Period. Choose people who show up, are not overloaded, and will work for your best interests. Personally, I prefer those who have strong ties to the community, and are working to give back to the community as well; but that is a preference, not a directive.
Finally, with the changes I have noticed in the rental market, the people who adopt more reasonable price points will be the ones rewarded with significantly more net rental income, both in annual and vacation rentals. The really cool thing about this, is that a landlord who makes the decision to maximize their annual income, rather than attempting to maximize the monthly rent, actually benefits all involved. While some would have you believe that getting the absolute maximum rental price is “winning”, they fail to account for the loss in opportunity cost or occupancy rates, which can make winning feel a lot more like losing at the end of the year.
John Gallant, Broker Engel & Völkers Islamorada
*Originally published in Keys Life Magazine