Should we reduce rent if tenants sign extended lease?

16 Replies

Our Anchorage-based single family home tenants' lease is up in May 2020. They have indicated they are going to save up for a down payment on a new house and would like to rent two more years. Yay! They have asked if we would consider a rent reduction for the new 2-year lease. I'd like to get your thoughts on this. They have been excellent tenants, always paid on time and have taken great care of the home. Certainly doing minor repairs and putting the rental back on the market (during COVID-19) is not ideal and would cost us more than a small discount to rent. The rent was comparable to other homes in the area when it was rented last year. Some landlords are now offering reduced rents just to fill vacancies during COVID-19.

I would appreciate your thoughts on if we should politely respond the rent will be the same rate for the new lease. Or if we should allow them a small discount? $25 off per month? $50 off per month?

I will typically do a $50/month discount for a two year lease. (It ends up being about a 3-5% discount. These are generally $1100-$1300/month rentals).
Depending on your price point, I would definitely consider a small rent reduction to keep them for another two years. Especially given the current economic market.  

@Cynthia Oistad  Pricing is always the most important decision to make when renewing. Some questions I would ask you are: 1. what is your risk tolerance? 2. What is your average turnaround time if it were vacant? 3. What kind of jobs are you underwriting to renew for so long?

@Cassi Justiz, thanks for your reply!

@Connor Dunham, we would like them to stay. We can typically turnaround the rental and lease it with zero downtime, but given COVID we could see a greater lag. We are considering a $20-$25 discount. The rent is $1800 but the expenses are such that we are only cashflowing $150 a month after monthly expenses and putting aside money each month for CAPEX, 5% vacancy and annual repairs.

Do you typically raise the rent every year and between tenants?  If so, you will be losing that for year two.  If you give them $20 off, make sure they know the rent will increase as it normally does for year 2.  So if it is $1800 year 1 and $1850 year 2 and you want to give them $20 off, do it off of those prices.

Instead of a rent reduction I would see if they want an upgrade. Instead of a $300-$600 reduction in rent yearly see if they'd be cool with the same rent and a new fridge, oven or dishwasher. 

@Cynthia Oistad

I absolutely offer no discount for signing a two year lease. At the end of the day, people can just leave whenever They want. So if you offer a discount for two year lease, and they stay for 11 or 1 or 6 mos, you’ve lost that extra money. 2 year lease means nothing to me.

I wouldn’t lock yourself into a 2 year lease at less than the market rent. Longer leases only benefit the tenants as they tend to leave whenever they want, so all you’ll be doing is guaranteeing no rent increases for the next couple years (and actually a rent reduction if you agree to the discount).

If they’re really saving up to buy a house of their own, they won’t likely be moving anyway until they’re ready to buy (and then they’ll move out the moment they do buy).

I’m betting they’ll stay whether you discount the rent or not. So no need to offer a discount. Instead, try offering them a one year lease with the promise of no increase (meaning just renew at the current rate but sounds better).

double check you are able to do a two year lease in your state, and if there are any additional requirements. In Florida, it can no longer be considered a residential lease if it is longer than one year, it switches to a commercial lease because of this and has other requirements for it to be valid

Originally posted by @Tony George :

@Theresa Harris I respectfully disagree with this response. Giving them a discount after an increase is no discount at all for good tenants wanting to renew for two more years.

You risk losing good tenants, during a recession.

 It depends on your market and how you run your business.  If tenants are hard to find, then yes; but two years is a long time.  I wouldn't give them a discount on their rent in the markets where I invest as vacancies are low.  Even if you renewed at the same rate for 2 years, that in itself is a discount since there are no rate increases.

I too would look into possibly upgrading something in the house rather than the rent reduction. I also would not lock myself into a 2 year lease with no ability to raise rents to  market rate. If your talking about reducing the rent by $25, forgive me if this comes off crass but I can't imagine the extra $500 over the course of the two years is going to get them that much closer to their house. I know every dollar counts but still. I'm dealing with a similar issue with a resident for a property I manage currently. They have been looking for a house for well over a year. Through no fault of their own, or so they say, several of their closings fell through. I could tell just be the way they were talking that if they had successfully closed on the property, they would be leaving immediately in the middle of the lease. Luckily I have an early lease termination clause in our lease that requires 30 days notice and a lease termination fee equal to two months of rent. Possibly guaranteeing them a renewal after the year at their current rate could be another option. You might lose out on one year of market rent growth but at least it wasn't a reduction. Hope this helps! 

@Cynthia Oistad a big part of this depends on your local market and what other options the tenant has. Your place is $1800, but what is the rent of comparable properties? Is there even other options available? I think some landlords fall into the mistake of increasing or not increasing rent automatically, without understanding what the market warrants.

You think it is a pain to rent a property during a pandemic, but also keep in mind it is a bigger pain for them to find a place and move during a pandemic.

When we do renewals, we generally offer two choices. Option 1 is renew for one year with a small increase and option two is month-to-month with a larger monthly increase. We only offer two year leases to our best tenants and it is never a discount below the one year option. Keep in mind that not increasing is the same as decreasing. When you figure in inflation - your taxes, insurance, etc. your costs will increase. 

Leases are mostly protection for tenants. I would offer the one year option and two year option at the same price. I would not discount either option over current rent. As I mentioned, not raising rent is already going to result in lower income for you due to your costs raising. If you do offer any concession, make is small. 

As far as your tenant being safe in the health care industry, as strange as it sounds, many doctors and nurses in the US are getting laid off right now. Hospitals are either stopping or delaying procedures and operations. On top of that, accidents are way down due to shelter in place. As a result, most hospitals in the country have seen a huge drop in business. I know the news shows the cities desperate for medical personnel, but in many places the surge has not hit. Take for example my city the hospital supports a region of 300,000 people. We have two major hospitals and they have less than 10 COVID hospitalizations. Yet most every clinic in the city is closed and they have stopped any non-life-essential procedures. 

It is strange times we live in. Keep in mind that tenants do not generally move over $25 or even $50 a month. They move when they need a bigger property, nicer property or due to a job situation. 

In my experience, people that are looking for another place always wind up staying longer than they originally thought. I also have discovered that they tend to give short notice and leave when they do find a place. I would probably not offer a reduced rent. It sounds like your cash flow is already thin and from your side of things, you can't really afford a reduction. At best in this situation, I would offer a lease renewal at the current rate if you feel like you're at market. If you're below market, then maybe a slight increase is in order. Tenants will consider the pita factor when considering a relocation so if you're confident they aren't going to be able to find a better place for less money, then no concession is needed to keep them there.

Thanks so much everyone!  We did end up offering a small $25/month discount in exchange for a two-year lease yesterday afternoon (before many of these comments came in). If they only do a one year lease, it will be at the same rental rate. They said they will think on it and let us know.   We were honest with them that we couldn't move much on the rent rate. We already upgraded all the kitchen appliances last summer so that wasn't an option, but a great idea for our other rentals at time of lease renewal!!  

I also like the idea of offering not to increase their rent (but honor same rental rate) if they renew with a new lease.  We did that on our other rental property when we approached those tenants at time of renewal. Honestly, I was sidetracked by their discount request and not wanting to lose them as they are wonderful tenants, that I didn't even consider making a counteroffer of offering to keep rent same rate at the time yesterday.  darn!!  Goes to show the psychology that if you make someone an offer, it forces them to consider it!   

This is great discussion and I really appreciate everyone taking time to share their thoughts!  These are some crazy times to be a landlord.  We are very thankful our three different tenants maintained their employment during the COVID-19  shutdowns and were able to pay on time and in full last month.