Let’s assume you have two identical multifamily buildings on the same street, in the exact same condition and built in the same year. The tenant quality for both properties is similar and both properties have the same monthly expenses. The only difference between these two properties is the amount of rental income being generated. Both properties started out with rental income of $3000 ten years ago. The owner of property number one has consistently increased rents to match the rate of inflation and is now achieving $5000 in monthly income. The owner of property number two has only raised rents a few time during the years and is currently collecting $4000 monthly. He’s always felt as if he didn’t need the extra funds to cover expenses then why be greedy and bother his tenants.
Both property owners are now looking to retire soon and considering selling their investments. Both owners speak with the same real estate agent and try to determine an appropriate selling price for the buildings. The owner of property number one was given a likely sales price of $500,000 based the numbers he provided the agent. Owner number two was provide a potential selling price of $400,000 based on the numbers he provide the agent.
There is a 20% different between the $500,000 that owner two received and the $400,000 that owner two received. There is also this exact same 20% difference in the rental income they are achieving!
Nothing affects the value of rental real estate more than its rental income. It sounds obvious but not everyone fully understand how underachieving on your rentals can affect your investment long-term. In the above (very close to real life) scenario, both owners ended up selling their investments for very close to what their agent quoted them. From her consistent attention to local rental rates and steady trend upward in what she charged, the owner of property number one was able to achieve close to $75,000 more than property owner number two. Owner number two was able to achieve a better than expected sales price ($426) partially because the buyers saw potential to increase rents after purchase and get the property back to achieving at its highest point.
Note: not only did the first owner retire $75,000 richer…she also achieved roughly $20,000 in additional rental over the 10 year span they both owned their properties.
$3000 Initial Rental Income * Annual Inflation Rate: 5.5%
Year 1 : 3169.22
Year 2 : 3347.99
Year 3 : 3536.84
Year 4 : 3736.35
Year 5 : 3947.11
Year 6 : 4169.75
Year 7 : 4404.96
Year 8 : 4653.44
Year 9 : 4915.93
Year 10 : 5193.22