Should I Hold Out For Higher Rent Or Fill My Rental Property Quickly?

Investors of course want to minimise vacancy in their rental properties. However many investors tend to wish to hold out for a higher rental return rather than fill their property (and start receiving income!) more quickly. 

In this post we'll run through a real example of the outcome of holding out for higher rent, based on a property in the Newcastle area which we had proposed to manage. Details of circumstances are contained in the text, but if you want to cut to the chase, you can scroll to the table at the end of the post.

In this case, the landlord selected another agent to manage the property based on the other agent estimating a higher rental return. So as we commence, let's revisit this (unfortunately common) reason for agent selection. ​

The Danger Of Choosing A Real Estate Agent Based On A Higher Rental Appraisal

More than a year ago we discussed in detail the question "Should I Choose The Agent That Estimates The Highest Rent For My Property?". 

As covered in this previous post, there are three primary reasons it can be a poor decision to choose an agent based on a higher rental estimate:

1. A high and unrealistic estimate of rental return may be being provided in order to secure the work i.e. management of the property
2. The higher the asking rent, the smaller the pool of potential quality applicants. A common misconception is that better quality tenants pay higher rents. This is not always true. As an example, tenants who have had trouble securing a rental elsewhere (potentially for good reason) may have little option than to pay above market rent to find their next rental
3. Holding out for the highest possible rent can actually be a poor financial decision

It is this last point - the financial impact of holding out for higher rent - which we will explore further.

What Happens When You Hold Out For Higher Rent? (A Real Example)

​Let's use our Newcastle property as an example.

• We had estimated a rental return of up to $580 for the property, based on a detailed review of comparable properties in the area and rents achieved in the 6 months prior. 
  
• As we were unsuccessful in managing the property, we kept an eye on its performance in the market. We're always open to learning if there's something to be learned from another approach! 
  
• The property was first listed on 13 Feb 2019 for $620 per week.
  
• Then on 1 March, the asking rent was dropped to $600 per week. 
  
• The property also was listed as available from 1st March.
  
• So, the property was on the market for 2 weeks at $620 before becoming vacant and non-income-producing from 1st March. 
  
• After the rent was dropped to $600,  the property continued to be advertised until 18 March. 

In summary, the property sat without producing income for at least two and a half weeks, from the available date until the date the listing was removed. In reality, it would have been longer as the new tenant would need to agree on a lease start date and physically move in, which means rent collection may not have begun for roughly another week or so. 

Given our knowledge of the area and the number of tenants seeking a similar property, we are sure a high quality tenant would have been found more quickly if the property was listed at a lower asking rent. Very likely, the property could have been filled with a tenant on the lease from 1st March. 

An agent estimating lower rental return than another agent is likely to be being more realistic than speculative. Which would you rather for your investment?

Comparison of the Minimum Vacancy vs Maximum Rent Approaches

​Many investors fall into a trap of thinking holding out for higher rent (rather than filling the property quickly) is better in the long run. In the table below we run through a comparison of the two approaches to show how this works out: the minimum vacancy approach versus the maximum rent approach.

And keep in mind, no agent has any good reason to estimate a lower rent. An agent estimating lower rental return than another agent is likely to be being more realistic than speculative. Which would you rather for your investment?

Once a tenant is secured at the rent amount $20 higher than recommended, it would take 86 weeks or 20 months to recover the rent lost in those 3 weeks while the property was vacant

To summarise the above table:

• Holding out for rent $20 higher than recommended would have left the property vacant an estimated 3 weeks longer than otherwise
• This period of vacancy would have resulted in $1,720 of rent not being collected during the time the property was vacant and non-income-producing
• Once a tenant is secured at the rent amount $20 higher than recommended, it would take 86 weeks or 20 months to recover the rent lost in those 3 weeks while the property was vacant

In Conclusion

Property management businesses generate income as a percentage of the rent they receive on behalf of landlords via the management fee. 

It is is no one's best interest to "lowball" a rental estimate and suggest a lower rental return than what should realistically be expected. There are however several reasons a business may estimate on the high - and often, unlikely - side. i.e. to secure the work by making a landlord think they will receive more rent than they would through another agent, or to make it seem like they must know something other agents don't in order to achieve a higher return. 

We see time and time again that other agencies lure prospective landlords on the promise of higher rental returns. More often than not, the outcome may be that that higher rent is received, but after an unnecessary and costly period of vacancy. 

Looking for a realistic rental appraisal and transparent service from a Newcastle property management company? Contact us today. 

Contact us