The Price of Waiting
Sometimes accepting slightly less rent today can put significantly more money in your pocket at the end of the year.
Whether you recently purchased your first rental property as a new real estate investor, or you became a landlord because you moved, inherited a home, couldn't sell when you wanted to, or decided to keep your former residence as an investment, there is a learning curve that comes with owning rental property.
Many of the owners we work with are either new investors or what we call accidental landlords. They may not have years of experience analyzing rental returns, vacancy costs, pricing trends, tax considerations, and the long-term financial performance of investment property.
Because of that, one of the most important concepts we help owners understand is that the highest monthly rent does not always produce the highest financial return.
The Goal Isn't the Highest Monthly Rent
When we price your home, our objective isn't simply to obtain the highest possible monthly rent.
Our goal is to help you achieve the best overall financial result.
Those are not always the same thing.
Consider a home listed for $2,000 per month.
At that rental rate, every vacant day represents approximately $65.75 in lost rental income.
The Vacancy Clock
$460 7 Days | $920 14 Days | $1,380 21 Days | $2,000 30 Days |
Lost Rent Is Only Part of the Cost
While a home remains vacant, the owner may still be paying for:
- Electricity
- Water
- Lawn maintenance
- Pool service, when applicable
- HOA-related costs
- Other expenses required to keep the home maintained and market-ready
For illustration, if a $2,000 rental has just $300 per month in utilities, lawn service, and other vacancy-related expenses, the actual cost of keeping that property vacant becomes approximately $75.60 per day, or more than $529 per week.
A $50 Reduction Is Not Necessarily a $50 Loss
This is where the financial comparison becomes extremely important.
| Monthly Rent Reduction | 12-Month Reduction | Equivalent Vacancy Rent Only | Equivalent Vacancy With $300 Holding Costs |
|---|---|---|---|
| $50/month | $600 | About 9 days | About 8 days |
| $75/month | $900 | About 14 days | About 12 days |
| $100/month | $1,200 | About 18 days | About 16 days |
| $150/month | $1,800 | About 27 days | About 24 days |
| $200/month | $2,400 | About 36 days | About 32 days |
We aren't simply asking, "Can we get another $50 per month?"
We're asking, "How much money are we willing to risk losing while trying to get it?"
What Another Home Rented For Isn't the Final Answer
Comparable rental properties are extremely important when we initially establish a rental price. They give us a starting point.
But once your property is actively listed, we begin receiving something even more valuable:
If another home rented for $2,000 thirty or sixty days ago, that's useful information. But it doesn't guarantee your home will rent for $2,000 today.
Inventory changes. Competition changes. Renter demand changes. Other landlords offer incentives. New properties enter the market. Apartments may offer concessions.
Renters are also comparing condition, location, floor plans, finishes, deposits, pet policies, and dozens of other factors.
Eventually, the performance of your own listing becomes one of the most important pieces of market information we have.
That's why our weekly updates aren't simply status reports.
They are decision points.
If the market isn't responding, we may recommend adjusting the price quickly rather than allowing another week of vacancy to accumulate while waiting for the market to prove the original price correct.
Consider Two Owners
Holds Firm at $2,000
Property remains vacant for approximately 30 days.
11 months × $2,000
$22,000
Less example vacancy holding costs:
-$300
Approximate result:
$21,700
Adjusts to $1,900
Property rents immediately.
12 months × $1,900
$22,800
Approximately $1,100 ahead
"But My Mortgage Is More Than the Rent"
This can be particularly difficult for owners whose mortgage payment equals or exceeds the property's current market rent.
If your mortgage is $2,100 and the market is telling us the home will rent for $1,900, accepting $1,900 may feel like accepting a $200 loss every month.
But your mortgage payment doesn't stop because the home is vacant.
If you reject $1,900 while hoping to eventually receive $2,100, you may continue paying the entire mortgage plus the expenses of maintaining an empty home while receiving zero rental income.
Cash Flow Is Important — But It Isn't the Whole Investment
Monthly cash flow is only one part of owning rental real estate.
A property can sometimes have slightly negative monthly cash flow while still providing other potential financial benefits.
1. Mortgage Principal Reduction
A mortgage payment isn't entirely money that disappears.
To the extent a payment is applied toward principal, the outstanding loan balance is being reduced and the owner's equity in the property is increasing.
That doesn't eliminate the importance of cash flow, but it does mean a $200 monthly cash-flow shortfall should not automatically be viewed the same way as simply losing $200.
2. Potential Tax Benefits
Rental real estate may also provide tax benefits that aren't obvious when simply comparing rent with the monthly mortgage payment.
Depending on the owner's individual situation, qualifying expenses may include items such as mortgage interest, property taxes, insurance, repairs, maintenance, utilities, professional services, and property-management expenses.
Residential rental property may also qualify for depreciation.
Tax laws and individual circumstances vary. Owners should consult with a qualified tax professional regarding deductions, depreciation, passive-loss rules, and their individual tax situation.
3. Potential Long-Term Appreciation
Real estate may also increase in value over time.
Appreciation is never guaranteed, but for a long-term owner, potential appreciation and mortgage principal reduction are important parts of the investment picture in addition to today's monthly cash flow.
Vacancy, However, Creates No Rental Income
A tenant paying slightly less rent can still:
- Generate monthly rental income
- Help offset the mortgage payment
- Contribute indirectly toward mortgage principal reduction
- Reduce the owner's utility and property-carrying burden
- Stop continued vacancy loss
- Allow the owner to remain invested for potential long-term appreciation
Why We May Recommend Another Price Adjustment Quickly
Sometimes an owner receives our weekly update and thinks:
"We just lowered the price. Why are we talking about lowering it again?"
The answer is simple:
The vacancy clock didn't stop.
Suppose a $2,000 property is reduced to $1,950 and another week passes without an application.
We could focus on protecting that additional $50.
But during that same week, approximately $450 in rental income may have disappeared, plus the property's ongoing holding expenses.
Sometimes it makes sense to maintain the price.
Sometimes the activity we're seeing tells us we're close.
But when the market clearly isn't responding, we don't want to become anchored to the original asking price, the owner's mortgage payment, or what another home rented for several weeks ago.
We want to respond to what the market is telling us today.
Our Goal: What's in Your Pocket at the End of the Year?
This is ultimately how we want our owners to evaluate our recommendations.
Don't judge the success of your rental property solely by the number written on the lease.
A home renting for $1,900 for twelve months can outperform a home advertised at $2,000 that loses a month or more to vacancy.
That's why a recommendation to reduce your rent by $50 or $100 isn't necessarily a recommendation to accept less.
It may be a recommendation designed to help you keep more.
Our responsibility as your property manager is not to defend an asking price.
Our responsibility is to help maximize the financial performance of your property.
We will continue evaluating market conditions, competing properties, and leasing activity, but we will also pay close attention to one of the most important data points of all:
How your property itself is performing in today's market.
