The Brutality of SL Rentals Math

A "ponygirl" (ugh) has a sob-sister letter up on the Herald, ranting and raving to M Linden because she can't make a dime off her rentals. She -- and most other people, because SL really isn't intended to help you make a rentals business. The days of Anshe Chung leveraging the Lindens' accidental arbitrage are long over, and it's a wonder if even ACS breaks even -- probably only by selling currency and content can they make a buck. I have a fairly harsh reply on the Herald comments with the reality check that anyone who has been around in this business will tell you -- the Lindens are not here to enable us to re-rent their sims. If anything, they do what they can to discourage such "arbitrage".

The important thing to study before going into the rentals business -- or staying in it when it's obvious it won't go anywhere -- is to take a long, hard, unromantic look at the math, what I call "mystery math" simply because the mystery doesn't unfold for a while. It's not only that people hear about Anshe Chung or some other get-rich-quick notion and come and try rentals. It's that when they buy an island, and have that falsely-reassuring month without tier, and their imagination pumps up to imagine the profits off it, they don't think about occupancy...recurring costs...reality.

Here's how it works.

I won't even discuss the $295 islands, which are most islands now, because unless you have very compelling builds on them, it is very hard to get people to pay $50 per 4096 for them (double what they'd pay for mainland of the same size over which they'd have more control).

Let's say you have a $195/month tiered grandfathered island, or a mainland sim for $195, either a whole sim, or parcels on different sims totally a sim. Let's say you decide to pancake it and chop it up with no remorse, extract as much as you can from it, with no landscaping -- just the land for people to put up their McMansions.

With full-prim islands, you can rent 16 parcels (65536 divided by 4096 = 16) each for $25 and make revenue of $400. (I'm saying "$25" simply because any more than that, and you are charging more than Linden Lab does for the 4096 tier level, and they offer 512 m2 or 117 more prims with that level than you are offering). After $195 tier, you will have $205 in the clear. If you maintain 100 percent occupancy, then you can pay yourself back for a $1000 island after 5 months (you'd be buying that used from another resident; the islands are $1000 now from the Lindens, too, but with $295) tier.

Let's say your occupancy slips to about 80 percent -- which it will in this market, and which would actually be still "ok". Now you have only 13 parcels making $25 or a revenue of $325, but after tier, your profit is only now $130, quite a ways down from that $205 you first eyed so greedily when you got into this business. You will now be taking nearly 8 months to get that initial investment paid for -- taking you through at least one really dry business cycle in the summer doldrums. 80 percent occupancy should be good, no? But the fixed cost of tier, month after month, eats that away.

Let's say you get only 75 percent occupancy, even trying really hard, renting 12 parcels @$25 to get $300 revenue, and then $105 profit -- making the investment back after only 9.5 months. Yes, you could be selling these parcels to people to deed to their groups on an island. Sell them for only $1/m, you will get 4096 out of them, or $14.95 per lot. But in this market, many people are simply giving these parcels away free, or selling them for what in fact is just the first month's tier, up front (unlike Lindens, who don't bill until after 30 days). So you may be able to accelerate you ROI by a few months, if you sell the parcels -- which you can't keep doing again if the people stay and don't move (you can see the great incentive to become unscrupulous here, although such scams actually don't occur as much as people think, precisely because there aren't as many sales of the parcels these days, just tier payments).

Let's say you decide to do this differently. Instead of making flat, merciless pancakes, you decide to devote one of the 4096s as landscaping, to divide up the lots, to create a pretty landing area, perhaps a pond or some trees or some kind of community build. So you just rent out the 15 x $25 to get the $375 revenue and still get $180. Having a less harsh chop-up might make you more attractive in the market and help keep your 100 percent occupancy, but lots of luck with that -- you are more likely to be down in the 80 percent or less category. One of the things you will be rapidly disabused about is the idea that people seeking mainly to have privacy and cybersex, or workshops to build and script and design, are going to want to come out of their lairs and hang around in your brilliantly sculptied "community area" with swimming pools, dancing, and jetskis. They won't. Yet if you don't spend a little of your square meters on some pretty infrastructure, they won't get a certain comfort level.

On the mainland, you can have a much rougher time because you have to constantly "buy the view" around your sim, face harassment, extortion, and blight from ad farms, have less control over your land. But you do have the advantage of grouping your land, so that if you group 65536 of tier, you get a 10 percent bonus of 6553 m2 of tier for free, the group generates. Now you can take that extra tier and help "buy the view" nearby, or use it for a store somewhere else, or if you have multiple parcels on sims where you have neighbours, buy primland to work into beautifying the rentals with more prims and parkland.

Let's look at this tier bonus as a tier discount, in the sense that you could be taking that 6553, and now *not* having to pay tier on it ($0.002960 per meter) and thus not paying $19.36. Think of that extra land generating you income of $19.36 if you were to rent it, and thus it offsets your $195 tier, and makes it $175. In reality, it doesn't quite work that way unless you are a ruthless renter -- what the bonus tier usually means is that you make more breathing space around your rentals, perhaps put up your office or a community center. Yet think of it then as giving you the ability not to sacrifice one of the 16 parcels of 4096 on your sim.

On the mainland, however, to keep in competition with the islands, which are simply more attractive (they can be deeded to the tenant's own group, meaning he has fuller control of the land, able to put up ban lines at whim, etc.), you'll have to charge less than $25. Less than the Lindens, less than private islands.

So let's say you have 15 parcels on your mainland sim for which you charge L$1500/week and $L5400 a month with a discount of 10 percent (as I do), you get 15 x US $19.71, revenue of $295.54, and ideally, with 100 percent occupancy, $120.65. But if you drop to 75 percent occupany, you drop to half your revenue, which is now 12 x $19.71 or only $61.52. That thin a margin can very easily get eaten up -- with advertising, prefab purchases, payment to staff, etc. It's why mainland is a very rough form of the rentals business to be in, and why you have to jump over your own knees to try to keep wresting anything out of it.

Islands are hard, but as soon as occupancy bites you in the ass and falls below 80 to 75, you are cooked. Mainland is even harsher, and even with tier bonus, you have to charge less, face more costs and worst occupancy, and can end up on the rocks quickly. You are looking at a very, very long timeline to make back the investment, and constantly facing, advertising, prefab or building expenses to try to make the lots more rentable, etc. It can be done -- but there are just too many people now trying to do the same thing.

Advertising costs aren't trivial -- they are now routinely $1000 ($3.65) to get on the "next" page and $50 or $100 even to get on the first page -- that's U.S. dollars $100. Prefabs are also now routinely costing L3500 or L6000 or even L20,000, which means US $13 or $25 or even $50 for a prefab isn't going to be outrageous these days.

Enter the openspace low-prim sim of 65536 and only 3745 prims. The openspace sims seem deceptively easy for "managing a revenue stream" as the awful Lilli Yifu imagines, but even there, I see some very sad soggy pancakes -- 4 4096s crammed on to a half openspace sim, granting each person only 468 prims and opening up to lag and viewline problems immediately.

But yes, if you sell all of them for $22/piece in rent ($25,000/month), you can make $176 off the sim for which you only pay $250 in upfront purchase from the Lindens, and take home $101 after tier. If you get $101 off your OS sim, then if you purchased it for $250, a little after two and a half months, you are free and clear. Seems very sweet. (Many people count that first free month as "free," and you could do it that way and say you'll have 1.5 months to payout, but usually that first month of "free" gets eaten up in prefabs, staff, advertising, etc.)

The opensims sell like hotcakes not only to end users, but to rental agents precisely because that math looks SOOOO much better. Get 100 percent occupancy by simply turning over the OS sim you retain control over for free -- or as many are doing, for a price, as much as L$25,000-30,000 per sim.

In this $75 chunk, that $295 full-island tier suddenly isn't so hard to manage, and chopping is very tempting. Even if you don't chop so harshly, and have a little more landscaping, you could in theory still wrest $100 off each one -- people seem to opt for more space and less visibility of neighbours versus more prims. Slap a bunch of cheap low-prim beach house prefabs on to your pancakes, and you can force the tenants to make do with less.

Still, flying around, I'm seeing lots of openspace sims chopped up mercilessly, with 4 people with 4096 wedges sharing half OS sims, 468 prims only, and the view lines definitely not so private any more. They don't rent then, and you wind up netting off them only $88 with 50 percent occupancy, and now only have $13 after tier. But see how the brutalities of Rentals Mystery Math really changes for you? When you have only 50 percent occupancy, as you well may have to suffer unless you really gain market share, you still can claim $13 profit per sim -- and you keep thinking "it will get better, I will do this or that". It is then very temping just to buy up 10 or 20 of these sims, because the profit seems fairly "easy" -- surely you can keep at least half of them full.

Let's say you blow $5000 on 20 OS sims ($250 a piece). For the first 30 days, you have no tier payments. You resell each one for L$25,000 a piece or $91 -- within 30 days you have $1825 made back of your investment (you won't likely be able to do better than that, although some people try to extract $30,000 per OS sim in resales). You now have to hope that you'll keep pretty full occupancy to earn the rest of the $3175 back. People charge anywhere from near cost ($20,000) to another L$25,000 in tier (US $91). So let's say you charge each customer $91 in tier per month, you collect $1820, and from that, pay out $1500 in tier -- you've got $320 in profits but...see where this is going? You were doing pretty well, but now, to pay back that $3175, you will need nearly 10 months. That's a long time in Second Life.

Somehow, from the first heady days and weeks, you went from being waaaay ahead of the mainland, quite a bit ahead of private islands, back to facing the same problems they do with long windows of ROI -- precisely because you grew too fast, thinking not of tier, not of occupancy, but of what you could recoup, fantastically, by wedging 4 tenants on 4096s with 468 prims on a half OS sim and trying to wrest $101 profit out of each sim.

Watch that window stretch to nearly 18 months or a year if your occupancy then slips down to 75 percent.

Why do so many people go into rentals, given the harshness of Mystery Math? That is the mystery...

Comments

[Ann Otoole]

"Why do so many people go into rentals, given the harshness of Mystery Math? That is the mystery..."

Probably because they read some idiot's guide to becoming a zillionaire in SL.

The real way to get rich off SL is by writing bullshit books about how to get rich in SL.

[Ciaran Laval]

Throw VAT into that equation and you have another chunk of issues and with the pound crumbling against the dollar there are going to be some tears ahead.

I think Openspaces are going to crash at some point, not because they're not popular but because the $75 tier fee becomes a big chunk if people aren't renting it out. People will bail.

I'm not sure about the need to pay so much in advertising mind you, certainly not in land rentals, property rentals seems a lot more competitive.

The rental market is important to Linden Lab, I'm sure they realise this in terms of cost savings on billing, building, support yadda yadda yadda.

However there's no point in landlords crying in public about the harsh realities, it's a competitive sector and you shouldn't be operating on a 100% occupancy model, which some people do. The whole deck of cards will come crashing down way too quickly if you work that way.

[Diag]

Thanks Prok for posting a definitive, first hand account of how difficult it can be to make money sub-leasing land in SL. The next time someone who's been in SL for 3 months informs me they've decided to buy a sim, chop it up, rent it out, and make a fortune, I'll refer them to this post.

Also, Ciaran, in regards to VAT and the crumbling UK pound :

Luckily us Australians are not required to pay our equivalent of VAT when we purchase stuff from the US of A (so far), however, with our dollar tanking as compared to the greenback, the cost of my $US40 tier has increased from $AU42 to over $AU60 just in the last month.

This can't be good for the SL land market.

[Margaret Leber]

I think my favorite hustle in the whole thing is the folks like Sirux Mahoney who offer "FULL 65,536sqm Commercial/ Residential Class5 Islands" to noobs that don't realize they're "buying" a low-calorie OpenSpaces region.

With four or eight...or 32 of these puppies stacked on a blade (remeber, LL promises "four per CPU", meaning I could host 16 of them on my desktop) someplace, they seem fine until they're all occupied and chock-full of badly-scripted freebies and a sex bed or twelve. Just like the cable companies overselling their internet access and then silently capping traffic when things get dicey.

So things get horribly laggy for Mike and Mary Nieube, they leave, the Estate Owner resells the sim, and we wonder why there's lousy retention and poor occupancy rates.

[Desmond Shang]

I'm not the only one that's profitable by far, there are plenty of others on the grid doing pretty well to this very day.

Much of this had to do with not overextending in 2007/2008, and having the regions we do for quite a long time now; such that they were paid off long ago.

That said, I won't crow too loudly because anything could happen, still. Everyone's a genius... until they suddenly aren't.

I keep about 90 days of tier reserves just in case of the metapocalypse, regardless if I see it coming or not. 90 days should be enough time to adapt to almost any new world order as best as can be done; if that's not long enough, there's likely no saving any of us.

[Sioban McMahon]

It CAN be done, however. Maybe through luck, maybe through a business plan and creation of a quality environment. Maybe both.

I manage a registered charity, raising donation in SL that we convert to dollars and transfer to the RL charity each month. We have a group of 15 sims, 12 of which are rental land (10 whole island rentals and 2 parcelled islands). We maintain 100% occupancy. An open island or parcel fills within hours of announcing availability. The rentals pay the LL bills on all 15 sims and generate additional lindens that we combine with donated lindens to send to the RL charity. Our monthly amounts to the charity vary, depending on how busy/popular the events in our public sims have been. The monthly donation to the RL charity ranges between $500-1800us. We raise the amounts owed to LL before they are due (no floating things on our credit cards).

I think our success comes from our two part approach. We have a great community that loves the atmosphere we've created in the sims. Most of our tenants are people who attended events (music, storytelling, theme dances, workshops, etc). The events support the rentals by providing the pool of potential tenants. The rentals support the events by paying the bills. Both rentals and events support the charity.

It took us a long time to reach this point. Building a strong community is HARD and takes not only up front work in creating the atmosphere, but long term and continuous work in providing great events and an interesting place.

If you want to get into this sort of thing, you need to do a realistic business plan in advance AND know that you'll likely lose money for the first few months.

Sit down and write out your worst case scenario costs for a month. No kidding yourself at all. Figure out what you'll need to charge for land to cover those costs and generate profit (or in our case lindens to be donated). Do your homework in world. Are there any sims charging the price you came up with? What do those sims have that makes people pay that level of rent (or are the sims sitting empty?)? Quality DOES pay in SL.

How are you going to attract tenants? There's a lot of competition out there. A community like ours is a great pool of potential tenants, but you need to invest a lot of time and energy in creating it. Is that something you are willing to do?

Prok is right, you can't just build a sim, put up a For Rent sign and expect to make money. Put the work in, create something special, and continue to put the work in, and you CAN be successful.

[Darien Caldwell]

When I had my estate, it wasn't wildly profitable, but I did make a decent sum, even though all my sims were $295 a month tier. However, the amount of time I had to put into it in order to keep it comfortably on the black side of the line wasn't justified by the profit.

Once LL dropped sim prices and started pushing Openspaces, I realized the writing was on the wall for your average Land Rental business, so I took the necessary actions to wind down my estate.

I fully agree you need to either have a passion for it that doesn't require profits, or something really compelling to make said profits. As LL continues to step into their new-found Estate Owner Role, it will become even more clear this is so.

[economic.mip]

Why I gave up on the rental idea and ate 20 bucks of tier once. It is not a good paying gig, and anyone who has tried it should know that. Add to it that I have a strong aversion to the "mature" things of SL, and it just wasn't my thing.

[Desmond Shang]

A very long time ago, one of Anshe's estate manager 'angels' mentioned that you needed dozens of regions to really make a go of it, to make your time worthwhile.

I thought: "Nah, it's my hobby, a few hundred bucks positive a month sure beats paying for a 15 dollar subscription any day..."

...and it does, but also, it doesn't. Being in the business means you can never really take a break. Ever. Sure, you can skip logging in a few days now and then, and if you do that strategically you can prevent burning out on the whole thing. But there is *definitely* a work and worry aspect to it. At 15 dollars a month or whatever, skipping a month or two and coming back is no big deal. But don't even dream of ever doing that if you manage land on the grid. Suddenly, it's joblike and businesslike in a way few are ready to take on.

Second, Anshe's angel was quite right, in the long term. I can justify my time because of the income, but it takes a lot of regions to do that. Most people have an online interests horizon of maybe just short of a year on anything focused; one look at the rotation of most people on the grid and in forums tells you that. So unless you are downright fixated on maintaining land as all the fun you will *ever* need to have, other motivations will eventually make or break you.

Nobody ever knows what the future holds. I remember when things looked pretty bleak in 2004 - nobody predicted the success to come. In other common-wisdom areas, I've seen people utterly shocked that the housing market collapsed, or, the stock market when everything was seemingly fine just a moment before.

I think the trick is to be prepared for absolutely anything. Utter failure - or utter success. The only surefire way to truly lose in the grand scheme of things is to never leave the illusory safety of a work cubicle.

[Prokofy Neva]

I really can't say what is keeping me involved in this business. I guess I keep plugging away at it, and think I will "make it better". I have little projects I do to "make it better" and when they work, and it *is* better, I feel vindicated.

[Ciaran Laval]

Pretty much agree Desmond. I have im's galore and my land holdings aren't a piddle in the ocean compared to Prok and you and I do have assistance but people want to talk to me.

The thing that keeps me going is that I love meeting new people, it's certainly not for profits and even though I recently expanded and have been working effing hard with that it does have a downside in terms of my social time in SL.

Hourly rate wise I'm working my cobs of for eff all. I wouldn't get out of bed for a job that paid this rate RL.

However the factor thay sways is for me is that it's my business, I'm the boss. I live or die by my decisions and despite swerveballs like VAT being thrown at me I'm still here (I know that disappoints some of you :p). Life experience is worth more than money in some circumstances.

However I am realistic about the whole business and I think that's where others fail miserably. being a landlord is not an easy task, despite what some say about us being leeches and untalented.

[Sioban]

I agree with Desmond, as well. It IS work. You (or some people you trust) have to be on every day and be ready to talk with your tenants. If you don't do that, there are always other sims to which you tenant can switch.

I also agree with the idea that you have to be ready for anything. People, the RL economy, and SL in various ways will always throw you a curve ball. Providing consistency to tenants is critical.

Since I posted that first comment, I tried to count how many sims and venues that I've seen open and close since I started with our sims (Feb 07). I can't do it. They're all starting to blur together. A few main things seem to be linked to each closure, though, either alone or in combination.

1. After the fun building stage, the folks weren't prepared for the work that rentals or ACTIVE club management takes.

2. Money, money, money. Didn't plan for a few lean months or hand unrealistic expectations for their occupancy rate or the amount of rent tenants will pay. In club, folks think that tip jars will pay their tier, too. Not likely.

3. Fights. Partners or friends go into a venture together and end up tearing each other apart. Different views of where the place should be going, perceived or real differences in the amount of work being done by each person, or combining romance and business.

[rightasrain]

There is no land--you are all in a shared fantasy that only makes the Lindens rich. It is over-priced data storage = digital swampland. And if you think the land market is tough--the Lindens are adding more and using the logon splash screens to promote it. Wake up! There is no land, no water only tier payments to LL and bad neighbors.

[Ciaran Laval]

Rightasrain, you're technically correct but you're missing an important aspect.

Check out the auctions for the new sims, look at the prices and then tell me there's not value in location, location, location.

Another factor is that waterfront land has always gone for more than inland parcels and still does.

This wouldn't happen if it were purely considered by the market as a data hosting solution, all land would be pretty much equal. That is not the case here.