Forsaking Good Money Over Bad!
Being lured in by the opportunity of getting more for a rental property, is a big novice investor mistake we have seen on many occasions.
This can happen in a number of ways.
Sometimes people are promised a higher rental amount and this figure can then get stuck in their head. What they haven’t considered however is how this may be achieved and whether time might be a factor in achieving this.
In holding out for a higher rental amount they haven’t factored in the loss of income that not only negates any gain but also may prove to be a negative benefit in the long run.
The sad thing is what people often find over time is that to have the property rented, they may have to drop the price and ultimately end up with less than the value than they expected in the first place.
This time frame could be weeks and even lead into months where the property sits vacant, depending on how far above the market value and the degree of market demand.
Here is one example to show you how dramatically, holding out for a higher rental amount can affect your overall return:
Scenario: Two different property managers who were experts in their area gave the client separate realistic rental appraisals. These rental amounts were also in line with our findings in the current market place, which was $550pw.
Unfortunately, this client decided instead to take the advice from his best friends cousin hairdresser whose uncle apparently just recently had leased the exact same property for $620pw.
Against all professional advice, this client stubbornly decided to also chase $620pw for his property.
At the market value rate, that property should have leased relatively easy within 7-14 days in the current market at that time. Regrettably, this property was listed well above the market value and the factor of time, therefore, worked against him.
The property sat on the market at $620pw and the first 2 weeks went by, with nothing. No interest and no inspections.
As all good property managers would, they advised the client to adjust the price to meet the market in order to stimulate interest. Sadly the client insisted on sticking to their guns, believing their amount was achievable.
6 weeks went by and unfortunately, the property manager couldn't deliver at the client’s rental asking price. As is often the case, the first property manager was sacked and a new one was brought in instead.
3 weeks further down the line the property was finally rented and the client got his gain, but it was nowhere near the $620pw he wanted, instead he got $560pw. So now let’s look at the figures. What has he gained and what has he lost?
At $560pw that equates to $29,120 per annum, which took him 9 weeks to obtain. By leaving the property vacant for 9 weeks, the loss in income to this client based on our initial rental valuation was $4,950.00.
The difference he gained by holding out for the 9 week period ended up being $520.00 per annum. In effect, his gain was actually a loss of $4,430.
Sad to say, this client still believed he was in front because he got an extra $10 per week, however, he didn’t sit down and calculate what time had done to wither away any gains.
Let’s look at this figure in more detail.
Even if the client had achieved the $620pw that his cousin’s hairdresser said he could get, he still would have been down $1,310 per annum.
The moral of the story is, sometimes chasing that “pot of gold” can cost far more than what you imagine.
I don’t know about you, but I would rather have my property rented and occupied in a shorter timeframe, so I can concentrate on the next project.