Rent pooling, a service that gives owners of rental apartments a guarantee of financial liquidity, is becoming more and more popular in a reality changed by the coronavirus pandemic.
What is this system and what are its advantages?
Moving work and education to the Internet had a significant impact on the housing market, and the reduced interest of tenants led to a crisis on the rental market. Additionally constant fluctuations in the short-term rental segment (popular booking websites showed an even 90% drop in the number of reservations), resulting from the global pandemic, led to permanent rent reductions, losses and attempts to sell apartments that had turned from bustling to empty.
So how not to lose income from renting an apartment? The answer to offsetting the possible effects of the crisis is rent pooling.
What is rent pooling?
Rent pooling involves adding dozens or even hundreds of apartments for rent to the pool, which allows for joint settlement of rental income. A large number of properties in the investment portfolio allows for: risk dispersion. This means that the owner of the apartment receives funds from the lease, even if his apartment is empty.
The more apartments in the pool, the lower the risk of vacancies,which protects owners against long-term losses they would suffer if the apartment was unrented. As we know, vacant buildings still generate maintenance costs.
What are the advantages of annuity pooling?
The combination of forces gives property owners certainty of income. Even if their flat or apartment remains unrented, they receive part of the common rental amount, less the value of the unrented apartments.
Another advantage of annuity pooling is lower management costs – up to 20% than when managing one property. Management costs on a commission basis usually reach 10-12%, and when managing a single apartment it is up to 15%, so the more apartments in the pool, the more favorable the operator’s offer. Transmission rent management to professionals who know the applicable regulations, rules and good practices may prove to be the best solution, especially in times of uncertain economic situation.
Rent pooling usually goes hand in hand with promotional activities that increase the chance of renting a property. Market fluctuations or a sudden crisis do not have such a significant impact on the income of tenants associated around a common portfolio.
Rent pooling – costs
The rent amount is determined based on the size, finishing standard and location of a given property, so each apartment is priced individually. It is worth noting that in the pool of apartments only the rent is settled, therefore owners share profits from the rental pool. If a given percentage of apartments are not rented in a given month, members of the common portfolio will receive the rent value reduced by the mentioned percentage.
Moreover, in this arrangement we are dealing with small fluctuations in rent levels. For example, when the vacancy rate in a given pool increases from 3 to 5%, the rent decreases by only 2%. Therefore, the property owner benefits even if his premises are not currently in use.
The remaining costs are borne by each owner individually, because the apartments remain their property or are operated by the real estate operator – depending on the conditions included in the contract. Property owners know how many apartments in the pool are rented, so they can predict the amount of rental income. The monthly profit from renting apartments is divided among the owners of the premises in proportion to their share. This arrangement gives certainty of paid bills, because owners earn money even if their apartment is empty at the moment.
Benefits of combining rents in times of crisis
The possibility of combining different properties into one financial portfolio avoids a situation in which apartment owners have to maintain the premises without the opportunity to earn money. The loan holidays offered by banks are not a long-term solution, so the constant income provided by rent pooling is an ideal option for them.
To sum up, rent pooling allows property owners to:
- risk dispersion,
- certainty of income and paid bills even in times of crisis,
- lower management costs,
- additional promotion of the property.
