To lower rent or not?

Investor · Naples, FL · Member since 2017 · 69 posts · 34 votes

As you can tell from the title I'm trying to decide whether I should lower my rent or not. Here's my situation. I have a class A property that I currently rent for 2800/mo. It is kind of niche for the area as I rent it fully furnished annually. I currently have great renters. They take good care of the property, keep it very clean, and even added 1500.00 dollars in landscaping on their own dime. Their lease is coming up in November and they want to stay but they want the rent lowered. They offered to sign a two year lease if I lowered the rent to 2600.00 a month. I think I know what I'm going to do but I thought I'd ask the community. So what would you do? Lower the rent and take the two year lease or something different?

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Joe SplitrockPro Member

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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

@Thomas S. last year I got an offer in the mail for a different internet provider that was $20 less per month. I was completely happy with the service of my current provider, so I called my provider and asked if they would lower my rate by $20 per month so I would stay with them. I got bounced around and went up two manager levels and the answer was, "our service is better and no price discount is available". A week later, I signed up with the other provider for $20 less and called my current provider to cancel. They immediately offered me a $20 discount to stay with them, but this was after I already had the other service installed. I told them it was too late and they proceeded to almost beg me to stay with them.

As a business owner, you have to be aware of your competition. Customers have options and they will move over money.

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Todd Powell
Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes
7y
@Gerald Barron I love a win-win! Although its rather easy to play hard ball, I know that when my tenants love the deal and me as a landlord, its easier in my life. With that said, I agree with others that if the current rent is below market, I would toss them the landscaping trade off and lower it only $100, which nets you pretty much the same and saves you the lawn care. Truth is, most tenants do not want the hassle of moving, and my guess is they are leveraging the fact that they will sign a two year lease in return for that reduction. That tells me they don't really want to move! Just my thoughts, but make them feel like the winner and do a win-win! In the end, you will be the winner!
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Todd Powell
Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes
7y
They spent the $1500 already, they want $200 off for two year lease = they have no intentions of moving! Love the tenant ask though, but they woke up and realized they just improved your property and now want something for it! Love it
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
7y
My thoughts:
1. Your current profit margin is mostly irrelevant in the picture.
2. You really need to know what market rates are. If you are overpriced, it is likely the tenants know this and are leveraging that against you. In that case, you need to measure the likelihood of getting another tenant at your over market price vs. getting one at market rates, if that is what the tenant wants to pay. If you are at or under market, paying on time and taking care of the house doesn't warrant a below market rent; that's part of the basic bargain of renting the house.
3. In either case signing a two year lease should have some increase built in to at least cover inflation. A two year fixed price lease is for the tenant's benefit, not yours.
4. If you do that anyway (the 2-year), do it as a one year with a tenant option to renew, but price it in a declining rate. For example, if you split the difference as has been suggested, have the lease where they pay $2800 the first year and $2600 if they exercise the option. That ensures they exercise the option (if that 2 years of lease is what you are after) and that if they break early you didn't leave all that money on the table. If they are definitely staying 2 years, they should have no problem with it; if they do, you'll know they are hedging their bets.
Overall, you can't know what to do without really knowing your market. You need to know how fast upper end houses rent, if you are priced right, over or under, and some idea how long a house stays on the market in your niche.
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Greg M.
Rental Property Investor · Los Angeles, CA · Member since 2017 · 2k+ posts · 5k+ votes
7y
Based on your statement that the current rent is fair and in-line with the market, I would not lower it. It sounds very much like they have no intention of leaving and are just looking for a discount. People who can afford $2,800 a month generally aren't swayed by $200, but they will still ask for it. Do you really think they are going to go through the time, expense, and headaches of finding a new place, packing all their stuff, hiring a moving company, unpacking, discontinuing and reestablishing all utilities, and changing their address with every company and person they know just to save $200 a month on a new place that is an unknown to them and they may not like as much? If it were a $1,500 rental, I would say yes they would for $200, but at $2,800 I think the odds are fairly low.

Worst case is they leave and your place is vacant for a month or so. So what! That's part of the business and should have been budgeted for and factored into your expenses and rental rate. Maybe the next tenant is just as awesome and stays 10 years. If the thought of a short term vacancy is worrisome, then you're in the wrong business.

If you accept $2,600, you have made it clear to them that not only can you survive at that level, but you are OK with that level. In their minds, their next renewal will be based on the $2,600 level, not the $2,800 market level. Any increase at all and you'll be viewed as the greedy landlord as you were just fine at $2,600.

If you absolutely feel the need to give them something, have them sign a 2-year contract at $2,800 a month with a clause in the contract that month 24 is $0, provided there have been no lease violations or late rent payments.
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Matt EklundPro Member
Rental Property Investor · Orange County, CA · Member since 2017 · 29 posts · 26 votes
7y
It sounds like they are contributing to the maintenance and upkeep of the property which equates to value on your end. 4% maintanance contingency would be $112/mo so $200 off might be a lot. They might be negotiating with the goal of having you keep the rent the same.. if they moved out and it took you 3 months to find a tenant, you would be minus $2800/mo. So there's that little caveat.
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Joel Fine
Rental Property Investor · Leander, TX · Member since 2018 · 183 posts · 264 votes
7y
Brainstorming here, what if you get some other concession from them in exchange for lower rent? For instance, maybe they deal with any repair under $300, even if it normally would be the landlord responsibility, in exchange for below market rent. If they are taking good care of the property, that shouldn't be much of a risk to them, but it might relieve you of some headaches, or at least one source of worry.
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Greg GaudetPro Member
Investor · Pukalani, HI · Member since 2017 · 413 posts · 291 votes
7y
@Gerald Barron I wouldn’t do it in my market because demand is so high, renters are desperate to find a place. But I also rent for cash flow in a C/D building. If I’m still getting a good return/cashflow then I would tell the renters that I’d split the difference and do 2,700 (assuming that I could rerent the place in a reasonable timeframe). Can’t imagine they’d leave over $100...
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Leanna Green
Rental Property Investor · Holbrook, MA · Member since 2017 · 36 posts · 3 votes
7y
The rent lowing is your decision if you like the way they keep your property and think the lower rent is fair then go for it, but to think that a tenant is going to adhere to a 2 year lease is ridiculous. I don't even like 1 year leases. If you have a great rental and the rent is fair the tenant will stay on their own and no 2 year or 1 year or 6 month lease will make a difference. I tend to create 60 to 90 day leases with 60 or 90 day notice by either party. If a tenant get a new job 1500 miles away then they going no matter if they have a 1 year lease or are a TAW.
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Sam Shueh
Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
7y
I will continue leasing to them but suggest one year only. $28 is not low by west coast standards.

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Ian WalshBusiness Member
Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
7y
Check the comps . We usually go for market value no matter what the scenario.
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Thaddeus D.
Investor · New York, NY · Member since 2016 · 57 posts · 22 votes
7y
@Thomas S. I totally disagree with the idea that tenants are customers. Mike Butler’s book puts it best. If tenants are customers and the customer is always right, are tenants always right? I think not. Think of them more like employees. If they are good tenants and their request is not ridiculous, lower the rent! Turnovers are the most expensive and time consuming activity.
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Jason Favero
Member since 2018 · 10 posts · 10 votes
7y
I've encountered a similar situation. I'm my case though I was a little freaked out about being able to get tenants in my property and I offered a reduced rent for a two year lease. At the time I was valuing the "security" of having paying tenants in the apartment for a longer term. In the end they took the reduced rent and a year later they broke the lease and walked away. At that point I just wished I had kept my rent where it was and on the on year lease. That was a lesson for me and now I would really just stick to the one year lease and maintaining the market rents. Understand each market and niche is different so that's a factor for sure..
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Patrick Soukup
Rental Property Investor · Fort Collins, CO · Member since 2015 · 273 posts · 127 votes
7y
I would pull the three closest comps (if you can find any - you stated this is a niche property) and show them that you are in fact at market rent. Depending on what your property taxes are doing (I'd assume increasing like the rest of the country), and insurance rates increasing, keeping the rent the same, you are more than likely already going to be decreasing your cash flow. This argument, I would at minimum, keep the rents the same.
Devils advocate here, how much do you like the tenants? How have they kept your property? How much would it cost to turn the place over and find new tenants? There is an intrinsic value to tenants and as an owner operator of a rental you can make that decision for yourself.
You got into the business of investment properties probably to make money and increase your net worth/diversify your portfolio. It is easy to get emotional about a property and tenants as the owner operator so remember your initial goals when getting this investment property. Good luck!
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Steven N.
Member since 2018 · 29 posts · 2 votes
7y
I’m new in the field and forum but this is my thought. There is value in a good tenant especially if they want a 2 year lease in what you said was a seasonal area. But you also have your own costs that increase. I would explain that you have increases every year. I would offer them 2600 for first year that increases to 2700 the next year for the 2 year lease. Then it would go back to 2800 if they choose to stay there.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
7y
"just on the babsis one months missed rent on turnover id lower it."
Fear based business management.
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