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Real Estate Occupancy vs. Price

Discussion in 'Real Estate Investing' started by AroundTheWorld, Aug 28, 2007.

  1. AroundTheWorld
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    AroundTheWorld Be in the Moment Speedway Pass

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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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  2. SteveO
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    SteveO Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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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.
     
  3. JesseO
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    JesseO Contributor

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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.
     
  4. AroundTheWorld
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    AroundTheWorld Be in the Moment Speedway Pass

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    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.
     
  5. biophase
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    biophase Legendary Contributor I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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

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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.
     
  7. biophase
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    biophase Legendary Contributor I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    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.
     
  8. AroundTheWorld
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    AroundTheWorld Be in the Moment Speedway Pass

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    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.
     
  9. SteveO
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    SteveO Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    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.
     
  10. biophase
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    biophase Legendary Contributor I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    Come on Steve, no seller would ever do that! :nono:
     
  11. andviv
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    andviv Gold Contributor Read Millionaire Fastlane FASTLANE INSIDER Speedway Pass Summit Attendee

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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.
     
  12. biophase
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    biophase Legendary Contributor I've Read UNSCRIPTED FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR Summit Attendee

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    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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