Rent reduction?

[Jacque]

I got a call recently from one of my very good tenants (clean living, usually pays promptly) who is seeking a rent reduction. I advised her that I would look into it and get back to her.

Now I know that the current market in this part of Sydney has suffered from a slump, just like many areas. There are now more properties advertised, and for cheaper rents, usually $20-30 less than what I am charging.

These are the possible solutions I've come up with to present to the tenant. I'd appreciate some feedback from experienced investors out there, particularly those used to self-managing or PM's. Thanks!

1. Say no and take the risk that she won't move out. This will probably end up with a disgruntled tenant who will be looking to soon move!

2. Say no but offer something in place of the rent reduction.
eg: A new heater, auto garage door opener? Where would I stand if I offered a $500 Store voucher instead? Would this be tax deductible, as it's a gift to the tenant for her being such a pleasure?

3. Say yes to a reduction if she signs a 12 mth lease? ( she is on a month by month continuing lease)

4. Say yes but offer a smaller reduction if the lease isn't renewed?

I like this tenant but like my rent as well! Any ideas much appreciated!
Thanks in advance,

 

[geoffw]

Negotiate.

You've presented a few good ideas already.

Tenant has perhaps suggested a figure- go down from present rent a little.

You said "usually" pays the rent on time. Maybe not always? Perhaps a discount (or rebate after 12 months) if rent is paid on time every time?

Can the tenant do something to help you in rerun? Gardens? Checking ads?

There's a very good Australian based book on negotiation- "How to get the best deal every time", by Wayne Berry. It's on http://www.successcentre.com.au/catalogue/titles.cfm?cur_titleID=335 - and I found my copy in Hornsby- but I had a bit of a time finding in the main booksellers' catalogues. Highly recommended for any sort of negotiation (even with children).

 

[kierank]

Originally posted by Jacque


2. Say no but offer something in place of the rent reduction.
eg: A new heater, auto garage door opener? Where would I stand if I offered a $500 Store voucher instead? Would this be tax deductible, as it's a gift to the tenant for her being such a pleasure?

I would be careful with the $500 Store Voucher. Your tenant could cash it in and then leave. You would be $500 worse off!!

I would suggest that firstly quantify the reduction (if you haven't already done so); that is, ask the tenant (no committment from you) how much of a reduction are they seeking??

Then, as geoffw suggested, negotiate!!

KieranK

 

[XBenX]

i think id be offering an incentive to stay on the same rent

dont want to have a decrease of rental income that effects servicability

 

[Jamie]

Hi Jacque!

Just a quick thought... Do you know the tenants motivation? Have they genuinely suffered a change in circumstance and NEED the rent reduction, or have they just decided to look around and "try one on..."

Is there any way to guage which way they will go if you leave the rent where it is? Do they realise all the costs involved (cleaning, moving costs, haggling with bond board, coming up with new bond elsewhere, looking for new prop, new lease fees etc)

I guess my advice is that your approach should depend on the reasons why the tenant wants a reduction. Its one thing to say they'll leave, its another completely to actually uproot yourself and really do it...

If you really do reduce the rent, Id ask for a 12mth lease... why should you offer something when they give nothing in return. If the rent reduction is only $20 or so, a 12mth lease protects you from a period of vacancy if they want to leave... On a month-to-month lease in a falling rental market you have everything to lose...

If the place is unfurnished, maybe an extra appliance? Disho, washer/dryer... the good thing is, you provide it free of charge but keep ownership... and its depreciable...

Just a few thoughts,

Jamie

 

[D.T.]

I think the adding value idea is the best one. Instead of your tennant paying less, why not provide more for the same money? Ie something like aircon or whitegoods.

* Works for her since she'd get better value for money, which is almost equivalent to a reduction.

* Works for you since it'd make your tennant happy, and you'd have something to deduct / depreciate.

Win Win situation if you ask me, tho I'd go for a 12m lease. Just my 2.2c (gst inc)

 

[Kevmeister]

Does she have a legitimate cause to think the current rent is "above market". Is it likely she can get the same type of accommodation (size, quality etc) in the same area, for the same price?

The problem with value-adding is that I think you're more likely to spend more $ than the short-term return. For example, if you offer a dishwasher but she agrees to the $20-$30 per week, a "smart" person would know a dishwasher is only worth $800-1000 and over 12 months she'd essentially have paid for it. Personally I wouldn't accept a deal like that.

If she does leave, it might only add $5 per week to your next rental, too. If you are going to add, I'd consider something likely to be considered a "fixture" of the house (eg. dishwasher, airconditioner), rather than something the tenant is likely to possess (eg. washing machine/dryer). Of course, what they're likely to have depends on the style of accomodation (eg. apartment renters might expect washer/dryer included).

If you agree to a reduction, I would do so *only* on the provision of accepting a 12 month lease. The $20-30 per week you lose is offset by the security of a tenant for 12 months. And it shows she is genuine about making a commitment to stay at the new rent levels, not simply trying to get a short-term reduction whilst she finds somewhere else to live *anyway*.

 

[Jacque]

Thanks all so much for your contributions and ideas- gee, I love this forum!

To answer some of the questions,
YES she does have a legitimate reason as a similar unit in the same building is renting for $40 less than what she is paying. It, too, is in similar condition and was on the market for some weeks before being rented out.

NO I don't know her real motivation. But it is a good point and I will try to find out. I am guessing that she is just "trying it on", as I would in the same situation!

I am going to take suggestions on board by first asking what reduction she is seeking (I am guessing it will be $40) then offer two scenarios: (providing they sign a 12 mth new lease and the inspection is OK)

1. Offer some incentive (heater, new washer/dryer, new TV) to keep there there at same rent. I can then claim this as a depreciable furnishing. Offer a store dept voucher (to a negotiated value $500-800)

2. Reduce rent by $20 a week.

Thanks for all your help again guys and I'll let you know how I get on! I still would like to know, however, if that voucher would be tax deductible?

 

[geoffw]

Jacque,

1. I'd offer the store voucher at the end of 12 months paying on time, not at the start- conditional on paying on time, all the time

2. You might even be able to get a store voucher from credit card bonus points before then

 

[XBenX]

sounds good geoff

win/win/win

 

[Kevmeister]

An up-front store voucher is a lot like sending an employee on a training course. They may be grateful for it and stay on some more, or they might leave next week regardless of what you've given them.

Just giving them the voucher hasn't secured anything for you. The voucher is OK if you get them into a 12 months lease, perhaps).

I'm kind of curious why you would want to spend a lump sum now rather than try amortise that cost of time?

 

[Jacque]

Kevin,

If a lump sum like suggested is tax deductible then it is worth it as my serviceability is not affected as much by a reduced rent.

An update: spoke to tenant today and it looks as though she is willing to accept a $15 reduction on condition of inspection and a 12 mth lease- will find out soon if that is ok. I'm happy with that, however, in the current market and so we'll see how that pans out.........

 

[Tony]

Hi Guys,
I have another suggestion for you Jacque, i hate rent reductions, but i appreciate the fact that you need a reliable tenant. So instead of giving a $15 rent reduction why don't you charge the same rent, but credit $15 off the rent, which goes towards a free weeks rent in the future. So if rent was $150 per week, then 10 weeks of paying the same undiscounted rent per week allows the tenant i free week rent free. This is conditional on 12 month lease & rent must be paid on time or you forfeit the free week in the current 10 week cycle.

Hope this helps
Tony

 

[Aceyducey]

Jacque,

You mentioned that she *usually* pays on time.

You could also offer a rent discount PROVIDED she paid on time, if her rent is late then she pays the existing rate. A great incentive for her to ensure that rent is on time and keeps your cashflow consistent.

You could also consider a rental reduction based on her maintaining certain elements of the flat to a high standard.

Cheers,

Aceyducey

 

[Lotana]

Hi Jacque,

Sorry for a late reply - was off line for a few days.

3. Say yes to a reduction if she signs a 12 mth lease? ( she is on a month by month continuing lease)

That's what I did a month ago. My tenants (in the south of sydney) were on continuing lease paying $320. Always on time and clean. They asked for a $20 reduction (to bring the rent in-line with the market, and they could easily move to another unit in the same building) during my regular biquarterly inspection - I said I'd get back to them on that. After giving it a thought, I asked them if they would be prepared to sign a 12-month lease on $310/week. They happily agreed. It really was a win-win situation.

Kind regards,

Lotana

 

[geoffw]

So far, Canberra has been in a little bit of a better situation. Landlord suggested $15pw increase for a 2br cottage (5% increase)- tenants agreed to $10pw in return for a 12 month lease.

But rent on the Queanbeyan block of flats is going up 10% (still below new letting market for that standard). Unless a tenant wants to negotiate.

 

[asy]

Originally posted by Lotana
biquarterly inspection

wouldn't that be a half yearly inspection?


asy

 

[Lotana]

Asy,

quote:
--------------------------------------------------------------------------------
Originally posted by Lotana
biquarterly inspection
--------------------------------------------------------------------------------

wouldn't that be a half yearly inspection?

As you wish. However I prefer words starting with "bi". They are much better on average than words starting with "half".

Cheers,

Lotana

 

[Aceyducey]

Lotana,

You could always use '6 monthly' - it's more precise and less subject to confusion. Some people would consider 'biquarterly' as twice per quarter.

Bi,

Aceyducey

 

[Lotana]

kewl