SECTION VII: Wrapping Up!

CHAPTER 24
YOU BE THE CONSULTANT:
LOW PROFITS ON
RENTAL APARTMENTS
Presented by:
Kenneth R. Ediza
> Reduce the problem to a bad WAYS TO
decision. DIAGNOSE
> Isolate the cause of bad AND
decision. SOLVE THE
> Figure out how to fix it. PROBLEM
 CASE PROBLEM

After the housing bust in 2008 and the

resulting uncertainty surrounding the future
of housing, many would be home buyers
decided to rent instead of buy. By 2012, the
rental market was booming. One company
that should have been reaping the benefits
of the boom was Focus Real Estate.
 CASE PROBLEM

Instead profits from its residential

apartment portfolio decreased by 7% from
2010 – 2011, despite a 3% increase in
occupancy rates during the same period. The
profit was due both to an increase in costs
and reduced revenue.
 WHO IS MAKING THE BAD DECISION?

The Apartment managers were

leasing to a high cost tenants
and charging them lower
prices.
DOES THE DECISION MAKER HAVE ENOUGH
INFORMATION TO MAKE A GOOD DECISION?

Yes, these managers were the

only one with enough
information to make good
decisions.
 AND THE INCENTIVE TO DO SO?

No. in this case, the managers

were rewarded for increasing
occupancy rates.
Source of the problem:
✓ Renting units to tenants for less
than market value
✓ And/or giving tenants special
deals
✓ High risk tenants
GET RID OF THE BONUSES
BASED ON OCCUPANCY
Fixing
REPLACE BONUSES the
problem
BASED ON PROFITABILITY
OF THE PROPERTY
 Current Structure Proposed Structure
Ave. Monthly Rent $700 $800
% of occupancy 93.0% 90.0%
Annual Rental Income $1,562,500 $1,728,000

Uncollected Rent (46,872) (17,280)

Net Rental Income $1,515,528 $1, 710,720
Total Expenses $772,919 $821,146
Net operating Income $742,609 $889574

Annual Increase: $146,966