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Contract vs Market Rent

System - Monday, November 26, 2018

Home & Condo Rentals Blog

November 26, 2018

Chasing Market Rent


Welcome to Home & Condo Rentals’ Monthly blog. This is an informational section of our website to help constantly educate our clients and the public on what we do and ways to improve your rental experience, both from an owner and tenant perspective. This month’s topic is geared towards Annual Rental owners and what to think about when renewing a lease to a current tenant. Seasonal owners may find this information useful as well as some of the same points of emphasis can be used in seasonal rentals also. 

First and foremost, let’s define the difference between Market Rent and Contract Rent. Market Rent is what your unit or a similar unit would get right now if it were to be listed for rent.  Contract Rent is the rental amount that is actually being paid by good, long term tenants right now. These are generally terms used when assessing the profitability of an income producing property, but the principles are extremely useful for analyzing rentals we manage as well. 

Whenever we are discussing the renewal of a lease with an owner, the first thing we do is inform them of where current market rates are. At this point we discuss what expenses have increased for the owner and various other things and decide on a renewal price. A good tenant in a unit that pays their rent on time and takes good care of the property is worth his/her weight in gold and we do everything we can to keep raises moderate to keep them in place. If a tenant moves out because an owner is trying to chase an extra $100/month and the property sits for a month and a half before their next tenant moves in, that is a month and a half worth of rent you will never get back. Then add on the fact that there are always up-front costs associated with finding a new tenant and there are always going to be repairs in between tenants and you can see how costs and lost revenue can add up pretty quickly. 

To illustrate my point, we will take a subject property of $1000 that the owner wants to renew at $1100 and the tenant has elected to move out. 

·        Renewing at $1,000

o  12 months @ $1,000= $12,000

o  Association App/Lease Fee= $0

o  Repairs= $0

o  Total= +$12,000

·        Raising at $1100

o  12 month @ $1,100= $13,200

o  One month vacancy= $1,000

o  Association App/Lease Fee= $100

o  Repairs= $500

o  Water/Electric in between tenants=$150

o  Total= +$11,450

·        Difference= -$550

I estimated the costs for the new tenant expenses and repairs/move out costs for this exercise. These could vary depending on how long the original tenant was in place and what the HOA charges for their association application/registration. This doesn’t take into account if the tenant was maintaining the landscaping and pool, if applicable. It doesn’t take a rocket scientist to see how wanting to keep the property at market rate can actually cost you in the long run. 

When we place a tenant, we do our best to find long term tenants that are looking to rent for multiple years. They generally take better care of the property and our owners are maximizing the amount they are getting out of the property. By keeping your Contract Rent slightly below market rates, you are keeping good tenants in place and although it seems like a backwards thought process, it ends up working out better for the owner of the property over the long haul. 

Thank you for taking the time to read our blog. This is the seventh in a series that we hope will help educate both owners and tenants in the Venice, Nokomis, Osprey, North Port and Englewood area. Once again, if there is ever a question that anyone has, please do not hesitate to call us. 

Thanks and have a wonderful day!!


The Home & Condo Staff