Should I reduce the rent or risk losing my tenants?
As the rental market softens, rents continue to fall. In Perth, median rents have fallen from $440 p/w in 2014 to $400 p/w in 2015. The question being asked by tenants is why they should pay $450 p/w to stay in this property, when a very similar property 2 streets over, is being advertised for $410 p/w? Rather than moving, most savvy tenants will ask for a rent reduction when it comes time to renew the lease.
So as the landlord, what’s better? Reduce the rent or find new tenants?
Let’s start with some simple math surrounding the realities of reducing your rent and what that might cost you.
Reducing the Rent
If you can secure the tenant by negotiating and lowering the rent by just $10 per week then you, right off the bat, have lost $520 per year. However, you will not have had any vacancy and you may have had to reduce by more if you had gone to the market.
Replacing the Tenant
There are certainly costs associated with replacing a tenant. When a tenant moves out a final inspection will need to be completed, and a letting fee is usually the equivalent of 1-2 weeks rent. These costs add up quickly – and for a $450 p/w property, the costs can quickly climb up to a $1000!!!
Adding to this, a soft market usually means there are less tenants out there, and the chance of vacancy is increased – where every day is costing you money!
Lastly, if the market is really soft, you may end up leasing the property for a price lower than you could have otherwise gotten from your existing tenants.
Keeping your quality tenant by slightly reducing the rent to meet the market may be a much more cost effective plan. It’s not to say that replacing tenants is never the right choice – simply you must weigh up your opportunity costs and decide what is more valuable to you.