That's it, I am off!!!

OK,

Nearly half of all my investment in SL wiped out in a single announcement. there is no way that landlords can compete with rents based on new islands purchased at US$1000 when I (and everyone else in the last year at least) has had to pay US$1695.

So, if anyone would like to buy the famous sim of Hoini, and an attached OpenSpace sim, for the bargain price of US$1000 the pair, contact me NOW inworld!

Rock
just too much

Why isn't your rent based on your ongoing cost? Basing it on the initial purchase price doesn't make sense. Tier didn't change, the purchase price of sims changed.

So, if the purchase price of a sim was US$1,000,000 and tier was US$1 per month, what would you charge per month to break even Trout? US$1?

I think you need a basic course in economics.

Rock

I've been renting in SL for several months, and recently moved to a parcel on an island estate for which I paid a purchase price, plus on-going tier. Before my recent move, I rented apartments or condos, not land.

But my point is, I looked long and hard for the land I rented, and for each condo. My decisions were never based on price alone. The ambiance, covenants, and other amenities are just as important to me as price. I don't feel ripped off today because the price of the land went down. The land I'm renting is beautiful, the covenants are what I wanted, and believe me, I had to look very hard to find this.

If you have a beautiful sim and your tenants are happy, it might be a little early to throw in the towel. Things may not turn ot the way you anticipate.

Allegria makes a good point. You know a lot about making a classy place. And if you can stay above breakeven - i.e. covering tier and premium account - then it's just a question of how much longer you will need to recover your initial investment.

I think you might be surprised what I know about economics. In fact, if you think your analogy in the post I quoted makes any sense whatsoever, I'll bet I know a lot more about economics than you. However, I wasn't asking to be snotty or anything, I was just asking about how you calculated your rent. Why get all aggressive with me?

When you are talking about either $1695 or $1000 purchase price compared to a monthly operating cost fixed at approximately $295 (discounting other expenses, such as electicity to run your computer, purchases related to building and maintaining the island, etc.) The primary ongoing cost should be the determining factor in setting up your rental rates, and since those rates are fixed for everyone, you are not at a disadvantage. Your ROI will not be affected at all. Other people will get a better ROI, but if yours was acceptable before, then it should still be acceptable. Genreally, the new owners will not be able to set their rent at a rate that doesn't allow them to recapture their tier. Once again, since that tier is identical to yours, there is no reason why they will be able to undercut you. Your problem is that you are adding capital expenses like the purchase of the island into your operational expenses. Bad math. You need to calculate your profitability based on your ability to earn more than you spend in operating the business. Calculate capital expenses separately. Of course, you need to budget for those, but with islands, it's a one time expense. Capital expenses should come out of the secondary level of profit. So, you make more than you spend, not counting capital expenses. In this respect, you are on a perfectly level playing field with newcomers. In fact, you have the advantage of an established business with a customer base. Then you budget separately from those expenses for capital expenses, like more islands, upgrades to your computer, etc. Then you take the remaining profit for yourself.

If you work out the math on this, you see that the newcomers who pay less for their sims have no competitive advatage over you. Your recapture rate on your investment will be different than theirs, but your rents should be just as competitive.

There. A basic course in economics. Now we've both had one.

What difference does it make how much you paid for it once the sim is rented out?

You either recuperated the purchase price already in which case it's your tenants who actually face devalued land, or you operate a pure rental in which case you already calculated your rent based on recuperating the purchase price within x months and found it acceptable.

Nothing has changed for you overnight. Someone who buys the sim at the end of the month will find the base price for selling estate land lowered to fit the new $1000 so there's no extra profit to be made from selling estate land all of a sudden, and someone who is operating a pure rental will be able to recuperate the purchase faster than you can, but again that doesn't affect you in any real way other than the thought that you're loosing out.

The only thing that changes is a lower cost of entry. Your investment hasn't been wiped out as you still have the equity of the island (it's market value, in the case of uncultivated sim, is merely lower). If the island is cultivated it's worth whatever the market is willing to pay for it.

This is exactly the point I was trying to get across on the other thread. No offense to the OP as this is aimed generally but it seems a fair few island owners who are running it as a business do not understand this basic business principle. I am quite genuinely shocked!

Trout, your lack of grasp of basic economics astounds me.

Try telling your local car hire company that they should not factor the cost of the purchase of the vehicle into their rates, only the ongoing maintenance costs. This is so funny it hurts.

Try looking up 'capital amortization' in any economics book.

Reread the definition of 'investment' before using indicators such as ROI.

As for your costing figures, they are way out. I did not pay US$1695 for one of my islands recently, I paid US$2017.05; and I do not pay US$295/month tier for each of my islands either, I pay US$351.05

But hey, what's 19% difference one way or another when you have such a good grasp of economics?

Rock

Hi, being a sim owner myself I feel a bit of pain also when my 30k assets became 18k worth of assets with one blogpost. However, theres a few things that must be considered.

Firstly, facts need to be right, island purchases have never been $1695 USD, for the past 17 months or so they have been $1675 USD, granted not a large differnce, but I would think that any sim owner knows what they paid for the sim from LL.

Secondly, the upkeep of your sim hasnt changed, you still need to get the same $295 per month to cover your obligations. your projected time to recoup your initial investment hasnt changed either, just the cost open another sim, which does work in your favor more now.

Third, if you where planning on reinvesting, you should have a idea about your cost/profit margins. I make about 200 USD a month off of each of my sims, this means now it will take 5 months to earn enough cash to reinvest, rather than the 8+ months I was looking at prior to the announcement.

By no means am I saying that this is good for sim owners, all Im saying is the loss of our assets, is being made up by our new found ability to add sims at a lower cost..

Also on another note, many sims I have purchased on the secondary markets where below 1000USD, at any time anyone could have purchased these sims for costs around that. so paying more for a sim by going thru LL was just silly in my point of view, and this was also known by LL as thier increased sim transfers equated to less sim sales, and this was a factor wieghing in on thier decision to lower island purchase costs

A given amount of revenue will generate a much lower ROI on a US$1650 investment than on a US$1000 outlay. theoretically, if the capital were borrowed, the margin may not even cover financing anymore. Then, yeah, the OP would be out of business.

This has got me thinking about the validity of "up front fees" for estate land rental. Right now, those estate owners who recouped most of their investment with the original "sale" to a renter must be feeling a lot less pain than those who were amortizing that cost over monthly "tier" fees.

I think it boils down to the OP is mad. He paid an extra $675....it sucks. My friend lives on estate land, those estate owners own approx. 50 sims and sent out a notice and blog last night about SL screwing them out of 40k and things are going to change, tier may go up to "protect" their investment. They were mad....they have every right to be, but voicing it to their renters and threats of upping tier out of frustration (when LL isn't even raising tier) are making people considering moving.

Sometimes you buy things and shortly thereafter they go on sale, fact of life. I definitely empathize with you but the reaction I've seen from some estate owners has shocked me as well.

Hoep you don't mind the questions but why did you pay over $2,000 for the island when you could have got one for $1695? Also what is special that you have to pay so much more tier for each island? Did you "buy them" without full transfer from someone and now pay the island owner tier?

VAT? If so, that is between you and your government. Obviously VAT makes it hard to compete to begin with. The US sim owner has a built in advantage on purchase and tier, hence can under cut.

Getting back the initial investment is the problem. If you go over time with pure rentals and have the VAT on your tier, as well as that extra 19% of purchase price, you are in for a long haul if you want to be competative price wise.

Not sure I make sense, but I am agreeing in general with the OP.

ahhh VAT that explains it - thanks Jannae

Islands have typically sold for more than $1675,, the variables that would determine the sale price of a sim is its popularity, or profit margins, resident contracts and unique builds to mention a few, I was once offered 2500 USD for my sim Capitol City, just because of the name. Of course Im in the habit of buying sims and not selling sims

YW Gabriele. Just a conjecture on my part, but the figures seem about right.

Makes me happy to have been born in the USA.

Rock, I have a Master's in Accounting and what Trout described IS the way most RL companies do business. He did not say that capital expenses should be ignored, only that they're not the first priority.

Your islands are assets. Yes, it may take longer to break-even, but taking a 50% loss on them out of frustration is not good business. Give it a few months, see how the rentals go, THEN make a decision.

We were assuming he was discussing new sims in the context of his problem. Otherwise it is comparing apples to oranges.

Can I have your stuff?

I also agree with you that that if an island owner have not made their ROI on their initial purchase price this will suck - but only if rental prices are affected as much as people think. I don't think it will in a huge way personally. It may mean though that island owners have to find extra ways to add value other than competing on price is all.

Hi Jackson,

You are right, the cost is now US$1675, not US$1695, an original typo which got perpetuated. But those prices are only to US customers and others outside of the EU. As i am European I have to pay an additional 19% on top.

What you calculation does not take into account is competition. If a new competitor enters the market at the new investment outlay of US$1000 he will have either a shorter payback period, or, and here is the rub, if he chooses the same payback period as I did (18 months), he can afford to reduce rents below my level. He can use his better ROI to force me out through agressive pricing (I lost 1/3 of my tenants in 1 week following the 19% VAT hike, most going to sims owned by US-based competitors who did not have to pay VAT).

In all my 3 years in the rental business in SL I have never had a tenant leave because my sim was lacking in ambiance or beauty (as another poster implied), in fact Hoini (our flagship sim) has been described in these forums by many people as being among the most beautiful in SL, no, it was because of the cost of rental, without exception.

Not only will I now face pressure on rental levels, but my residuals have taken a hit too, so my exit costs have risen.

Qie quite rightly pointed out that if I had borrowed the money to buy the sims I have bought I would be in trouble.

LL also let it be known that they would be reviewing the cost of island purchases again for Q3. If, as I suspect, they will be slashing the cost of island purchases again you may wish to seriously consider if you want to remain in this rental game.

Rock

You have one thing going for you that the new startup business does not though - your existing customers. Do not write them off - if they are happy and they know you then they will stay. The new business has to find customers first.

Unfortunately, it isn't hard when you dangle lower cost at most people.