What rent should we charge to get 1000€ in actual profits before tax?

In yesterday’s post, I explained that we needed to make a 1000€ in actual profits before tax in order to break even in profits after tax (meaning that we don’t make any profits but we don’t lose money either). So now we have to find out how much we should charge our tenants in order to make it happen.

Here are my initial assumptions:

• There will be one change in tenant per year and per studio. Ideally, tenants would stay longer than a year but it’s usually not the case in studios as they are considered temporary accommodation and most of the time rented by students (note that, in our case, only 1 out of 4 tenants was a student). Anyway, with studios, a lot of turnover is to be expected so 1 change per year seems pretty reasonable.

• Each flat will be empty one month per year. Ideally, as soon as a tenant lets us know that he/she plans on leaving, we should get our agency to actively search for a new tenant so that the new one moves in right when the other one moves out. The issue is that it doesn’t seem too easy to find new tenants. We experienced vacancies twice: once for each flat (the first one in November and the second one in March). Both times, the agency needed 3 months and a half before they found a new tenant. Apart from the economic crisis and parents not being too fond of paying an extra accommodation for their kids if they can stay at home, one obstacle we have to face is that tenants of furnished flats are bound by law to a one month-notice only, whereas it’s three month-notice for unfurnished flats. And it really makes a difference: if we had had a three-month-notice for our flats, they would have been empty only half a month each…So anyway, by postulating only one month vacancy per flat each year, I am pretty optimistic.

• The different expenses we have to face are more or less the same than the previous year. It seems pretty correct since we have faced so far this year roughly the same amount of expenses than last year at the same period.

• Both studios are rented for the same price. One used to be a bit more expensive but our agency advised us to lower its price so they now cost the same.

Here are the results:

We should rent each flat for 550€ per month (plus expenses!). This is crazy! Nobody will ever pay that price for a studio in a medium-size town like mine! Maybe if it was facing the beach but there’s no beach there.

Can we cut some expenses?

I used to think that we were in negative figures because we were living far away and therefore needed to pay an agency to look for tenants and manage the flats. But even if we cut the agency’s expenses altogether and nothing broke and we found somebody willing to pay 400€ (it’s still too expensive for that city but a bit more affordable than 550€), we would still be in deficit after paying taxes.

Can we give our properties more value so that it justifies a higher rent?

A studio is a studio, it’s small and it doesn’t matter how fancy and nice it is, it is still small and people won’t want to pay a lot of money for just a studio. They’d rather have something bigger a little less nice.

So, after this long analysis (6 posts), I came to the conclusion that there is nothing we can currently do to break even or make a little profit. We just have to deal with the loss and consider it an investment. Although this observation is not very optimistic, knowing the figures actually makes me feel better about what I consider a personal failure. When I still thought that there was something we could do or we should have done differently, I was feeling anxious and nervous all the time. Now, I know. I know the figures, I know the factors that influence them and I know that I don’t really hold the cards so I might as well take it peacefully, at last. But this doesn’t mean that I am throwing in the towel: I actually realized two new important things thanks to this analysis and we can still take action on one of them so…see you tomorrow!