Finding the balance between your ideal price and making a profit.
Everyone has an ideal monthly rent that they’d like to set for their property and this price usually includes a comfortable profit. But, at a certain point your ideal price will actually cost you money. The point of owning property is to earn money on an investment, but many owners don’t take in to account the cost of vacancy. If your asking price is too high then your property will remain vacant.
Vacant properties can be a huge loss so you need to carefully weigh your priorities. Do you want to remain stubborn about getting your goal price or is it worth the money to bring your price down to fair market value?
We have a simple way to calculate what that cost will be. But first, there’s some numbers you need to know.
Some things to consider when calculating your Goal Price (GP) are:
- Property taxes
- Home Owner’s Association fees
- Utilities that you’ll retain responsibility for (Water, trash, gas, cable, electricity, etc.)
- Property Insurance premium
- Costs for maintenance
Fair Market Value
Fair Market Value (FMV) is the price that would get your unit rented quickly to a well-qualified applicant. There are two ways to find the FMV of your unit.
- Conduct a market analysis. Find out how much similar properties in comparable areas have sold or rented for recently.
- Have an appraisal done. Not only will this reveal any potential maintenance issues, it will also let you know what other properties in the same area have sold for. Appraisers are impartial and see enough houses to know what they’re talking about.
- Figure out how much it would cost to replace your property – tools, materials, technology, manpower, land, etc. This works best in areas that don’t have many properties similar to your own.
- Ask us! We’re here to help you.
Average Utility Costs (AUC)
These can be found in your mailbox every month, they’re not shy.
Now we can get to the math!
First we’ll calculate the Vacancy Cost (VC) per day of the unit.
(FMV + AUC) ÷ 30 days = VC
Example : ($1500 + $125 + $110) ÷ 30 Days = $57.83
Each day that your unit is empty will cost you $57.83
Second we’ll calculate the Income Difference (ID) between FMV and GP over a year.
(GP x 12 Months) – (FMV x 12 months)
Example : ($1600 x 12) – ($1500 x 12) = ID
$19,200 – $18,000
$1200 = ID
Over the course of a year you could make $1200 more if you can get your Goal Price.
Finally, we’ll calculate how many days your property can remain vacant before your GP actually begins to cost you money.
ID ÷ VC = Days before you begin losing money
Example : $1200 ÷ $57.83 = 20.75
That means that if your property remains vacant for more than 20 days then you will actually lose money.
Our priority here at Real Property Management – Last Frontier is to save you money. We have the experience to determine the most profitable rent price and find you the most qualified tenants. If you would like to learn more, visit our website or call our office.