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REAL ESTATE Occupancy vs. Price

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AroundTheWorld

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It is a common belief that the higher your occupation rate, the better (unless you are bargain shopping :banana: )

97% occupied means more money in your pocket than 90% occupied, right?

Not necessarily.

The numbers below are based on self - storage. The column on the left shows a "base price" that will yield the average occupancy rate for our area. The column on the right shows a 10% increase in rent - and a lower occupancy rate. Look what happens to the bottom line.
 

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SteveO

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You have hit on a major key point. There are many people in the business of rentals that don't even understand this. I have seen people proudly boast that they have 100% occupancy with a waiting list. That is upside my friend.

The math is the driver of the entire process. Find a property that is not maximizing the income. Increase the bottom line. Sell!!!

Thanks for an excellent post ATW.
 

JesseO

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97% occupied means more money in your pocket than 90% occupied, right?

Not necessarily.



97% is better than 90% if the prices are the same (call me Captain Obvious). The ideal way is to find the best balance for making the most money, which I think you've nailed with this simple example.
 

AroundTheWorld

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97% is better than 90% if the prices are the same (call me Captain Obvious). The ideal way is to find the best balance for making the most money, which I think you've nailed with this simple example.


Exactly!

As your price goes up, however... eventually your occupancy will begin to go down.

It is striking that balance between occupancy and price that brings you your highest yield.
 

biophase

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I have seen people proudly boast that they have 100% occupancy with a waiting list.

Isn't there an old saying, that if you're 100% occupied, you're prices are too low.
 

JesseO

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Sounds about right, biophase. As a manager, it's nice to not have a lot of turnover though. This makes me realize that I should be increasing rental prices more aggressively.
 

biophase

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Sounds about right, biophase. As a manager, it's nice to not have a lot of turnover though. This makes me realize that I should be increasing rental prices more aggressively.

It is nice to have long term tenants. But we all know that our goal is to increase value not to be nice to the tenants.

I find this the most amusing thing about for sale posts on 4-10 units. They all say, long term tenants! rents below market! as if they are great selling points.
 

AroundTheWorld

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I find this the most amusing thing about for sale posts on 4-10 units. They all say, long term tenants! rents below market! as if they are great selling points.

Yes.... but consider the audience. I sapose an ad like that works for lots of folks - Heck it works for me if they are selling at a low or reasonable price for their NOI. I see an opp. for adding value.
 

SteveO

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They all say, long term tenants! rents below market! as if they are great selling points.

Actually it is a great selling point... unless the seller is trying to use proforma rents in the sales numbers. If you can get it based on current income, then there may be some opportunity.
 

andviv

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I think is key to find the price point where a current tenant accepts the rent increase instead of looking for a new place.

If I am renting a place and paying $750 a month, and the property has improved since I moved in, I probably will not look for a new place if the rent increases a 3% ($750 x 3% = $22.50). I wouldn't want to move out of a place that is improving for 'just' twenty bucks more a month (in any case, moving is too expensive).

Bio, Yes, increasing value is key if your current strategy is to increase value and cash out. I've know people that prefer to have below-market rents as their current strategy is to cash flow from it and don't mind to sacrifice a little rent income in exchange of a more stable set of tenants.
 

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biophase

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I've know people that prefer to have below-market rents as their current strategy is to cash flow from it and don't mind to sacrifice a little rent income in exchange of a more stable set of tenants.

I'm fine with that. My issue is that when it's time to sell, they say long term tenants and then they say rents under market. Then they list proforma rents on the listing and ask a price according to proforma. You can't have it all ways.
 

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