Higher Rent vs Minimum Vacancy vs Quality Tenancy: The 3-Way Balance In Setting Ideal Rent

This week we were engaged in a discussion with some industry peers around the need to consider more than just the dollar value when setting rent for an investment property. Below, we share a real-world example of the outcome of an investor seeking high rent above other considerations, and the avoidable results of this approach. 

In the process we introduce the 3-Way Balance of Setting The Ideal Rent. 

The Real-World Example of Seeking High Rent Above All Else

A number of years ago, we had a meeting with an investor who was buying an off-the-plan apartment close to Newcastle Beach. At the time he advised us that he was seeking $800+ per week in rent.

In response, our estimate at the time based on market conditions and oversupply of similar offerings was $670-$700 per week. For a number of reasons (differences in rental expectation being one of them!), we didn't end up working together. 

Looking back now on what ended up happening with this property, we see:

• It was first listed for $780pw (approximately $100pw above our recommendation)
• It was advertised on market for 2 months before the asking rent was dropped to $750pw
• The property was removed from advertising (presumably filled at $750pw) after 85 days on market.

In summary, throughout its first campaign, the property was listed for roughly $80 more than we estimated, and was vacant for at least 85 days (approx. 12 weeks). 

Holding onto the "ideal" of high rent resulted in 12 weeks of vacancy for $80 extra rent i.e. this approach cost the investor $960 in rent while waiting!

Holding out for high rent resulted in 12 weeks of vacancy for $80 extra  per week. This approach cost the investor $960 in rent while waiting.

And if that wasn't enough...

Records show that this same property listed again 6 months later. 

Just think about this. Not only did the investor lose out on almost $1,000 in rental income while waiting for somebody to pay the requested high rent, the tenant who went into the property obviously was not a quality long-term tenant, and the process needed to start all over again only 6 months down the track.

When the property listed for the second time:

• It listed again for the premium asking rent of $780 pw
  
• Again, it was reduced after 2 months but this time all the way to $700pw instead of $750 as previously
  
• After a further 3 months rent was lowered again to $680pw "including 2 weeks free rent"
  
• It was eventually removed from advertising after an excruciating 149 days on market.

​Not only did the investor lose out on almost $1,000 in rental income while waiting for somebody to pay the requested high rent, the tenant who  eventually went into the property left after only 6 months and the leasing process had to start all over again.

So, in this second round of long term vacancy, the property remained entirely non-income producing for 21 weeks, off the back of a 12 week vacancy in the previous year. 

In total, this high rent objective resulted in 32 weeks of vacancy over the course of approximately 18 months. That is, the property sat vacant producing no income for 40% of the time over an 18 month period. 

​In total, this high rent objective resulted in 32 weeks of vacancy over the course of approximately 18 months. That is, the property sat vacant producing no income for 40% of the time over an 18 month period. 

The 3-Way Balance of Setting The Ideal Rent

This above case is extreme, but it is also real and is not uncommon.

We so often speak with investors who either have inflated ideas of what the property is worth on the rental market, or have been mislead by agencies estimating very high rent to secure the listing. 
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It's like the old saying "Good; fast; cheap - choose two". When setting the rent for an investment there needs to be a balance between 3 factors: rent, vacancy, quality tenancy. 

The 3-Way Balance of Setting Ideal Rent

As the focus shifts towards obtaining the highest rent, the vacancy period increases and number of quality tenants to choose from reduces. 

Likewise if the focus is on minimum vacancy period, you may not receive optimal rent and could be filling the vacancy with a low-quality applicant. 

And last, if the focus is on finding a quality long-term tenant, there sometimes needs to be an acceptance that highest rent may not be achieved, and/or that finding that applicant can take a little longer.

Which Of The 3 Rental Elements Should Never Be Compromised?

Of the three of these measures, it can be argued that one element above the others should not be compromised - quality tenancy.

The reason for this is that the ideal rent is not the highest rent that any tenant will pay, but the highest rent a quality tenant will pay. ​

And from a financial perspective for an investor, a period of vacancy may have a lowering effect on rental yield, but a poor tenant selection in the first instance can have a major impact on the value of the property. 

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