Is Reducing Your Rents The Best Option?

Depending on what stage of the real estate cycle you are in, reducing rents may seem beneficial to you. STOP! Before you reduce your rents, have you considered any alternatives? Have you considered rent concessions? If you have to make a choice between rent reductions vs. rent concessions, rent concessions are the way to go.

Consider this, if you currently have a rental property for a $1,000 a month, and you reduce your rent to $800 a month to attract tenants, you just created a huge problem for yourself. To push the rent back to $1,000 a month, you must have a rent increase, which would communicate a negative message to your tenants.

Instead of decreasing the rent, you could offer rent concessions. For instance, since the rent on this property is $1,000 a month, you could give tenants the first two months free, leaving your rent in place at $1,000. You could also offer to amortize that first two months over the 12-month period of the lease.

So, instead of paying $12,000 annually ($1,000 a month), you would be asking them to pay only $10,000 for that year. If you divide that amount by 12, you actually reduced their rent-you just didn't reduce it on paper. That way, when that lease comes due or if the market tightens up, the rent is still $1,000 a month.

If you use a rent concession instead of a rent reduction, you will be able to renew their lease without any concessions next year, because you gave those out when the tenant moved in. However, if the market is still soft, you could give them another month for free, but the rent is still $1,000 a month. It's much easier to have the market pick up where it left off without trying to increase the rent on your tenant base. Your tenants will be much happier.

Now, if you were in a Buy Low situation, you would expect to be able to find pretty acceptable deals. However, if you shop around, you can expect to get even better deals. Finding deals and knowing the best way to fill vacancies, all plays into knowing the real estate cycles, and which stage you are in. Sometimes you may need to reduce rents to fill vacancies, depending on the cycle, but you should always consider rent concessions first.

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