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The Lurking Property Management Occupancy Myth
It's better to set the rent or lease low and fill it fast, then set it at a high price and be vacant for much longer. The money you lose from the apartment being empty is more than what you will gain from the higher rent. I hear this myth often. Some managers live by it. But is it always that true?
This recognizable myth has its roots with our very early ancestors. We have a tendency to prefer avoiding losses over making gains. Psychologists call it Risk Aversion. Losing money is much more painful than the joy of making it. In all of our minds, they don't have equal value.
Risk Aversion makes total and complete sense from an evolutionary standpoint. Imagine you are a vulnerable primate, foraging for food in the African savannah. Perched high in a tree, you see a single low hanging fruit in a nearby plant. On your way down to get it, you spot two huge apples a short walk across an open plain. You're faced with a dilemma. Do you cross the dreaded plains risking death, or do you happily collect the easy fruit?
A 'fruit' in your hand is better than two in the bush. Our ancestors decided to eat the low hanging fruit. It's better to eat what you can get easily, then to take risks. Besides, you'll find more fruit later. Similar to, take what you can get.
This strategy works well. But real estate investing is not fruit picking. Using the same approach costs you money so really have to sit back and be smart about how you approach things.
The critical flaw in applying this strategy to real estate is that it fails to account for value gained over time. You see, the same fruit was not coming in monthly. If it did, taking one risk to gain double the fruit for life would have had a drastically different affect on our psychology.
We have to use a method that accounts for income over time. Let's use an example. Renting or leasing an apartment for $700/month for 2 years is $16,800 in income. If we increase the rent to $950 and the unit is vacant for 6 months the income is $17,100. Even though the apartment is only occupied for 18 months, it's at a high enough rent to compensate.
It is a formula that you have to create for yourself. Remember that everything is a numbers game. Play around with the numbers for your situation and see what happens.
Deciding on the right rent is ultimately a judgement call. There are several other factors to think about when it comes to setting rents. But don't dismiss higher rents out of hand because they may increase vacancy. Your strategy should be to maximize income, not occupancy, always keep that in mind.
It is also important to make sure that you have a home service provider. One way to make a higher rent seem ore suitable is if your property is slightly upgraded or seem like it is upgraded.
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