10 March 2011 ~ 2 Comments

100% Occupancy, Raise your Rent

Income properties are a great investment. You receive rental income on a monthly basis, but also enjoy capital appreciation—or at the very least, a solid hedge against inflation. Whether you are thinking of a Vancouver rental or an apartment for rent in Edmonton, rental properties can be a good investment for you.

So are you ready to buy your rental property in Vancouver? Let’s take hypothetical investor Doug.  He purchases his first income property: an 8-unit apartment for rent in Vancouver. He loves the downtown Vancouver apartment, has a favorable unit mix, and there has only been one vacancy in the last two years—and that vacancy didn’t last very long. As far as Doug is concerned, he has made the perfect investment.

Vancouver rental building

Apartments for rent in Vancouver

Raise the rents!

Typically, investment properties in low-vacancy, heavily renter-occupied housing areas that incur infrequent vacancies have one problem: their rents are too low. If the rents weren’t below market, they would incur significantly more turnover.

That’s the key word: turnover

Turnover is a good thing; vacancies, themselves, are not. What’s the difference? A vacancy occurs when a unit has been turned (i.e. “rent ready”) and it does not have a tenant, or a prospective tenant. Turnover occurs when someone moves out of a unit and another moves in.

You may be saying to yourself, “that sounds like basically the same thing. Why not keep rents low to keep the same tenants longer?”

Using Doug’s property above as an example, let’s explore why it behooves an investor to keep Vancouver rent at market.

As stated earlier, Doug owns an 8-unit property that has incurred zero vacancies over the last year. The rents are below market; each unit rents for $1300 per month. Thus, the property’s Gross Operating Income (GOI) is $124,800 (=$1300 x 8 units x 12 months).

Let’s assume that the market rents are closer to $1500 per month and that Doug will incur the standard vacancy rate for Vancouver rentals: 2%. Apply these assumptions to Doug’s property and its rent increase to $141,200 [($1500 x 8 units x 12 months)-2%].

That’s a difference of $16,400 (=$141,200 – $124,800) in GOI which should equate to a similar difference in net operating income, assuming expenses stay about the same.

Let’s take it even further; let’s say Doug has some trouble with vacancies during the rent increase and incurs double the normal vacancy rate: 4%. The resulting GOI of $138,240 [($1500 x 8 units x 12 months) – 4%] would still result in an increase in revenue of $13440 over Doug’s initial figures!

That’s not all!

While the immediate improvement in cash flow is nice, the real perk is the increase in property value. Property appreciation will also add to your bottom line.

To conclude, Doug could continue to keep Vancouver rent as is and enjoy a fully occupied building. Or, he could increase the rent, allowing him to enjoy more cash flow and significantly more building value.

Something to consider when you have apartments for rent in Edmonton or Vancouver apartment rentals.

2 Responses to “100% Occupancy, Raise your Rent”

  1. properties for lease 8 April 2011 at 11:43 pm Permalink

    While the immediate improvement in cash flow is nice, the real perk is the increase in property value. Property appreciation will also add to your bottom line

  2. Helena 24 September 2011 at 9:52 am Permalink

    Now this is interesting – had not thought about that equation. Getting more, giving less.

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