When looking to rent out an investment property, landlords with inevitably ask "How much rent do you think I can get for it?". We covered the intricacies of attempting to work this out yourself in the article What Can I Rent My House Out For?
Unfortunately, in efforts of wooing a prospective landlord, some real estate agencies will provide an inflated and at times unrealistic estimate of rental return. In this article, we wanted to break down what this means for the landlord.
Naturally, a landlord will want to achieve the highest rental return possible from a quality tenant. For this reason it can be tempting to select the property manager who has provided the highest rental estimate for the property.
But there are reasons to be wary of this, including:
This third point seems counterintuitive. Let's go through an example.
How can holding out for higher rent be a poor financial decision?
Occasionally we have been unsuccessful in securing management of a rental property due to the landlord receiving a higher rental estimate from another agent. As the saying goes, you can't win them all and we are always respectful of the landlord's decision in such a case.
However, we have seen instances of a rental listing being managed by an alternative agent at a higher price than we estimated, only to find that the property has remained listed on the market (i.e. vacant and not generating income) for weeks, despite a buoyant market.
As an example, we recently estimated a rental return of $400 per week for a property, and another agent promised $430 per week. Our estimate was based on knowledge of the area, rental history and trends in the surrounding location, and our understanding of the landlord's needs around cash flow (speed of commencement and financial commitments).
Unfortunately, the lure of $430 rather than $400 per week was too great and we were unsuccessful in working with the landlord. However, the property remained advertised at $430 and vacant for a minimum of 5 weeks before the listing was removed. It could have still been longer before the lease period commenced and rental income began flowing.
In this case, the difference in rental income per week was $30. The property was vacant for 5 weeks. Based on our experience in the area across many comparable homes, we would have had the property filled with a lease commencement within 2 weeks of listing.
Having set a higher rent, the property remained non-income generating for at least 3 weeks longer than if a more comparable market rate was set. Had the property been filled, the property would have generated a minimum of 3 weeks x $400 of rent i.e. $1200. Instead they received no income from the property.
You may think "but what about in the long run?". Well, that additional $30 per week equates to roughly $120 per month in rent received. It would take 10 months of higher rent to make up for the 3 week vacancy up front.
Additionally, a rental price more comparable to the market would have secured a greater pool of potential applicants, enabling the selection of the highest calibre tenant (not just the highest paying) from a broader pool.
When rental appraisals vary, who do you believe?
Continuing to be completely frank, we are the owners of the business, not simply employees in a real estate agency. It is a direct objective of ours to achieve the optimal rental return from an investment property, just as it is the landlord's. We will estimate optimal rent based on return for comparable properties in the area, rental history and trends in the area, demand vs supply of similar properties and more.
However if it is highest rental return only which determines your choice of property manager, we are very likely a poor choice of property management for you. Our focus is more broadly on the acquisition of the highest quality tenant, from a large pool of suitable applicants, ensuring the ongoing care for your investment with reliable, sustainable and optimal rental income in return.
About Carnelian Property Management Newcastle
We are a family-owned and run Newcastle business. We’re landlords. We’re home owners. We’ve also been long-term tenants. We are refreshingly accessible with intimate knowledge of the greater Newcastle, Lake Macquarie and Fern Bay rental markets.
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