Savvy investors look at the maintenance of the property when they decide how much they are willing to pay for it. If the property doesn’t look good enough, it won’t fetch good rents, hence the value is lower.
The second thing they look at is the rents. Too often you see advertised that “rents should be higher.” Buyers immediately ask themselves, “well, then, why aren’t they?” They begin looking for reasons and find deferred maintenance.
Here’s why lower rents mean lower sales prices. While they are looking at rents investors are using a couple of figures to multiply the net income by. One is the gross rent multiplier. That is a figure that, among other things, when multiplied times the gross rental income, gives a rough idea of what the property ought to sell for. The lower the rent, the lower the sales price (or what the investor would be willing to pay).
Another is the capitalization rate, which is the Net Operating Income divided by the the asking or sale price. The Net Operating Income is the gross rents less vacancy allowance less expenses. The lower the rents, the lower the cap rate. An acceptable cap rate in most parts of the country now is around 7 to 8 percent. So if your rents aren’t high enough, your sales price will have to be lower to create an acceptable cap rate.
Can you do it everywhere? Absolutely not. Some places in the country even keeping rents as high as they were last year is a challenge. But that is a different topic. Where at all possible, raise the rent every year.
If you raise the rent a small amount every year, say three to five percent, it is too small an amount to make it worthwhile for your tenants to move, but large enough that you stay even or even get ahead a little. Just be sure to do it every year. You owe it to yourself, your property and your good tenants.
Copyright 2009 Cain Publications, Inc., used by permission.
Robert Cain is a nationally-recognized speaker and writer on property management and real estate issues. For a free sample copy of the Rental Property Reporter call 800-654-5456 or visit their web site at www.rentalprop.com.
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