Tuesday, May 19, 2009

Passive Income- The Investor's Dream

Passive income- that’s the name of the game for most real estate investors. Revenue exceeds expenses. Let’s look at revenue:

Maximize Rental Property Revenue
Maximizing revenue from rental properties is a function of monthly rental rate, vacancy rates, the impact of incentives for the tenant to perform and ancillary fees charged to tenants. The formula for a year’s revenue may look like this:

12 x Monthly Rent
+ Late Fees Collected
- Rent Discounts for Good Performance
- Lost Income from Vacancies
= Annual Rental Revenue

It’s easy to say, “I can maximize revenue by increasing rent every 12 months, hitting hard on late fees and being stingy on incentive discounts.” In real life, maximizing revenues is an art, not a science. Why? Your tenants are clients who buy a service-your rental unit.

Tenants will only be willing to pay so much until they go down the street and buy your competitor’s product, and then the “lost income from vacancies” goes way up.

Let’s look at the “rent maximization” components and see how we can optimize each:

Monthly Rent Maximization
The challenge here is to push your rent, without going over the top. The key is to know your competition and what they charge. How do you find your competition? Call them or just read what they publish on-line. The information can be found at:


An alternative is to list your properties at a certain rent level, even when it is occupied, and see if the phone rings. If you are flooded with calls from qualified renters your rent is too low. No phone calls? The listed rent is too high.

Raising the Rent
Some property owners are timid about raising rents. To overcome this, remember:
When costs go up, rent goes up when possible.

Do your homework. Think of the confidence you will have talking to your current tenant when you know you can make the phone ring.

Make it a reasonable rent increase, especially if they are good tenants. What is reasonable? 3-5% of rents or 5-10% in a strong market with low vacancy rates. Consider this: in order for your tenant to move out they will need to:
  • come up with a month’s deposit for their new property
  • take the time, effort, and money to find a new rental
  • physically move- painful and expensive physically, emotionally, and often financially.

Bottom line: if the pain of the rent increase is less than moving, they will stay.

Sometimes you should make it an unreasonable rent increase! One property owner we know took over a rental and doubled the rent, from $400 to $800 (market rate). The unit was way under rented and she assumed that she would end up with a vacancy, as she usually did. Guess what? The tenant stayed, paying the additional rent month after month.

Next Blog: Penalties, Incentives, and Vacancies

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