the-abcs-of-real-estate-investing-ken LifeFeeling

high as 20 percent. Regardless of the number, the point I’m trying to make is that when you
are selling your property it is not always to your benefit to be at 100 percent occupancy.
When I’m buying a property, 100 percent occupancy to me means that the rents are too low
or the seller is trying to pull one over on me.
To maximize your sale price, you are
better off having your market rents
high and creating some vacancy.
Let me give you an example. If your twenty-unit property was 100 percent occupied and
the rents were an average of $35 lower per unit when compared to the market rents in the
area, you would be losing $700 in rent per month (assuming again you were at 100 percent
occupancy). You’ve left $8,400 in annual cash flow for the next buyer ($700 per month
multiplied by 12 months). This shortfall goes straight to the bottom line, and remember the
bottom line determines the ultimate value of the property.
Going back to our formula for calculating the offer price of a property, you know that
the offer price equals the net operating income divided by the capitalization rate. Using a
conservative capitalization rate of 10 percent, divided into the $8,400 in cash flow left on
the table, you would experience an $84,000 reduction in your purchase price. Just from
having your rents $35 per unit too low!
As I mentioned before, buyers will assume there will be some vacancy, so they will
assign a 5 -7 percent vacancy rate on your property even if it is currently 100 percent
occupied or not.
You can see how impossible it becomes to get top dollar for your property if your rents
are below-market. Sometimes it is difficult to have all the rents in line with the market, but
you should at least have some of them at that level. If you do not have one unit with rents at
market and your buyer read this book, you’ll find yourself on the other side of the valuation
discussion we outlined in Chapter Seven. That’s not a good place to be. At that point, your
only alternatives will be to sell your property low, or hold on to it and prepare it for sale by
increasing your rents and therefore the future operation’s performance potential.
Your team members can help you update your market rent information. Management
company and broker contacts will be particularly helpful. I must emphasize, however, that
to be successful in this business, you need to know this information on an ongoing basis.
You can see from the example above how quickly a small $35 rent difference can result in
loss of cash flow and loss of value. This is a business you’ll want to stay on top of.
Now that you know the importance of maximizing the future potential income of the
property, you’re probably wondering how you accomplish it. There are two ways:
• You re-rent vacancies at the market rent (retail).
• You renew your current resident leases at the market rent (retail).
Don’t be alarmed if these actions create vacancies and turnover. In some cases they will.
But remember, you are not managing to maximize cash flow here. You are managing the
property for sale and that means you want to demonstrate the property’s highest potential
income. You can only do that by demonstrating your rental units can command rents at the