Optimal Property Management Strategies 1 INTERNATIONAL REAL ESTATE REVIEW 2001 Vol. 4 No. 1: pp. 1 - 25 Optimal Property Management Strategies Peter F. Colwell Department of Finance, College of Commerce, University of Illinois at Urbana-Champaign, Champaign, Illinois 61820, USA or pcolwell@uiuc.edu Yuehchuan Kung GMAC – RFC, 8400 Normandale Lake Blvd. Suite 600, Minneapolis, MN 55437, USA or yuehchuan.kung@gmacrfc.com Tyler T. Yang Freddie Mac, 8200 Jones Branch Drive., McLean,VA 22209, USA or tyler_yang@freddiemac.com This paper examines the optimal operation strategies for income properties. Specifically, the rental rate and the operating expense should be set at levels to maximize the return on investment. The results suggest that for a given demand curve of a specific rental property, there exist optimal levels of the income ratio, the operating expense ratio, and the vacancy rate. With a Cobb-Douglas demand curve, we derived closed form solutions of these optimal ratios for a given income property. The relevant local comparative statics of these ratios also are derived. These comparative statics also provide insight into the optimal building size and optimal rehabilitation decisions. An empirical case study was conducted to demonstrate how the model can be applied in real life situations. Keywords Rental Property; Vacancy Rate; Operating Strategy; Profit Optimization Introduction The purpose of this paper is to analyze operating strategies for income properties. Two of the most important decisions for managers to make are the amount of rent and operating expenses that should be charged or be spent on the rental property. These issues were rarely studied in the academic