Perceived value, preservation of the desired price point of the rental rate, and actual value of the property when income or cash flow is a factor in calculating its value.
I run a hotel where the rooms go for $100 per night. I might be able to rent a few more rooms each night if I lowered the rate, but if I rent too many rooms at $75 per night, for example, then I'm now running a $75-per-night hotel instead of a $100-per-night hotel, it becomes very difficult if not impossible to find people willing to pay $100 per night if that many people are paying only $75 - and the value of the hotel itself has instantly declined by 25%. (One of the most commonly accepted means of valuing a hotel as a real estate investment is a multiple of its annual room revenue. For many hotels, 25% of their value can be a a million bucks or more.)
Meanwhile, I'm better off renting 75 rooms at $100 than I would be renting 100 rooms at $75. Either way, I'm making the same $7500 in revenue but the variable costs -- housekeeping payroll, utilities, food for the complimentary breakfast, etc. - go up because of the extra bodies in the extra rooms, and eat into much more of the $7500 in revenue, which is not increased as a result. (Michael Forrest Jones' answer to What do hotels do with unused guest rooms?)
So, the heck with it, I'll let those other 25 rooms go empty, and I'll get to keep a lot more of my $7500.
Sooner or later, someone will come along who's willing to pay me $100 per night for one of the empty rooms - if I'm still holding that price point. From time to time, on a busy night, I do fill the hotel at something close to $100 per night.
Of course, if I don't fill the hotel at that price as often as I'd like, or if finding takers at that price point seems to be becoming an ongoing problem -- because of location, competition, etc. -- then I'll revisit the matter, reconsider and in the end, don't be stupid about it.
The same math works for apartments and residential rents: the dynamics are more clearly illustrated using hotel rooms as an example. Multiply the figures involved by maybe ten or twenty, multiply the time frames involved by thirty or more . . .
Originally appeared on Quora
I run a hotel where the rooms go for $100 per night. I might be able to rent a few more rooms each night if I lowered the rate, but if I rent too many rooms at $75 per night, for example, then I'm now running a $75-per-night hotel instead of a $100-per-night hotel, it becomes very difficult if not impossible to find people willing to pay $100 per night if that many people are paying only $75 - and the value of the hotel itself has instantly declined by 25%. (One of the most commonly accepted means of valuing a hotel as a real estate investment is a multiple of its annual room revenue. For many hotels, 25% of their value can be a a million bucks or more.)
Meanwhile, I'm better off renting 75 rooms at $100 than I would be renting 100 rooms at $75. Either way, I'm making the same $7500 in revenue but the variable costs -- housekeeping payroll, utilities, food for the complimentary breakfast, etc. - go up because of the extra bodies in the extra rooms, and eat into much more of the $7500 in revenue, which is not increased as a result. (Michael Forrest Jones' answer to What do hotels do with unused guest rooms?)
So, the heck with it, I'll let those other 25 rooms go empty, and I'll get to keep a lot more of my $7500.
Sooner or later, someone will come along who's willing to pay me $100 per night for one of the empty rooms - if I'm still holding that price point. From time to time, on a busy night, I do fill the hotel at something close to $100 per night.
Of course, if I don't fill the hotel at that price as often as I'd like, or if finding takers at that price point seems to be becoming an ongoing problem -- because of location, competition, etc. -- then I'll revisit the matter, reconsider and in the end, don't be stupid about it.
The same math works for apartments and residential rents: the dynamics are more clearly illustrated using hotel rooms as an example. Multiply the figures involved by maybe ten or twenty, multiply the time frames involved by thirty or more . . .
Originally appeared on Quora
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