which one matters – market rents or cash flow rents?
what is the best rents when it comes to renting your home? One of the biggest misconception is called “cash flow” break-even method. below is how it works.
- “cash flow” break-even rents –
- It is a “theoretical number” that equals to the sum of all monthly cash requirements to keep a rental running without the need to putting any additional cash into the rentals.
- The monthly cash requirements normally include mortgage payment (principal and interest), property tax, insurance, maintenance, utilities and all the other related costs that are property specified (such as condo fees, special assessment, property management fee etc.)
- some landlords may work out the number and decide this is the minimum rents that should be aimed for in order to be break even or not “loss” money. If you can make more, you then in so called “positive cash flow zone”.
- The issues of this method – there are a few following problems in this approach
- it turns blind eyes on the current market. If the market is in a so called “high-demand” mode, they may leave too much on the table; If the tides turn the local market into a “renter” market, this calculated rents are likely too high to attract any serious interest. you may find yourself sitting on the vacant homes for months.
- Some landlords may be fooled by the illusion of positive cash flow and ignore the fact that the rents that works is driven by the fundamental force of the current market, supply and demand. This happens a lot especially when the real estate cycle is under so called “hot market”, many may experience “positive cash flow” and get an illusion that this should last forever because somehow his or her rental is special.
- While certain landlords cling to the artificial number that might be too high to the current market, these rentals also likely become perfect targets to these “professional” tenants – they know exactly how to take advantage of the desperation from the long vacancy, pay what being asked to get in, before turning into their true color.
Having learned from the above common traps, CARMAP applies a totally different approach, it combines the benefits of so called “market rents” along with the long-term investment strategy to ride off the real estate cycle, regardless it is hot or cold. here is how it works in nutshell:
- We utilize an automate data collection system to keep track all the market rents and specify the preliminary market rents for a certain home at a certain location for a certain time-period.
- Further applying so called fine-tune algorithm automatically, CARMAP narrows down the optimized market rent that allows the optimized market response while recouping the highest rents matching the current market demands.
- This approach will maximize the profit when the market is going strong, while accumulating a good cash reserve pool for the “rainy days”, namely, the years when the market turns soft. This way, landlords will have a well-preserved cash reservoir to tap into whenever needed.
- The biggest benefit of market rents is to reduce the unnecessary vacancy due to the unrealistic rent set up wrongly guided by wishful thinking, and in turn save or make big in the end.
- It works towards landlords’ advantage the most when long-term investment strategy is being employed as well, simply because when A+ home is being chosen carefully, its strength of long term exponential growth over the time will easily override all short term fluctuations and yield a healthy cash on cash return in the end.
That is why we apply “market rents” as part of the CARMAP service to make sure your home is always being rented to the right tenants at the right rent with little to no vacancy.