As a landlord, at some point you’ll be faced with this decision: Your tenants want to extend their lease for another year, but only at a lower price. There are several important considerations to help guide you through this decision.
The first question I have for you may surprise you, but has played an important part in my decision making: Do you like the tenants?
Out of the three times that I’ve been presented with this dilemma, this has played the most important role in two. The first was a wonderful woman named “Kim”. Kim’s family included a handicapped daughter, and they were finding services in the U.S. rather expensive. She asked for a rent reduction, which I happily gave her. I figured that it was better to keep an otherwise perfect tenant and lose the $100/month.
The second example is with a man I’ll call “Bob.” Bob was, without a doubt, my least favorite tenant. Ever. By far. Although he did pay each month on time, and was taking reasonably good care of the property, he lied to me constantly, and there always seemed to be something wrong (at least in his head). When he said that he was “willing” to renew his lease but only if I reduced the rent, I quickly (but only after having a good laugh with my family) told him that his lease would be ending as originally agreed.
In most cases, however, you’ll have to weigh pros and cons of keeping a renter vs. losing monthly income. That is true of my third example, a nice couple who took good care of the property, but wanted to pay less for a second year. What do you do when the renter has been good, paid on time, etc., but wants a rent reduction? Here are some considerations:
- What does the rental market look like? Are there many properties like yours available? Are they renting quickly?
- What are people getting for their leases? Have the prices dropped anyway, meaning that a reduced rent is closer to what you would be getting with a new lease? Or have rents gone up, meaning that you could have significantly more income?
- Can you afford the lower income?
- Can you afford having the property empty?
- How much will it cost to turn around the property? Consider how long it could be empty, costs for getting the home ready for the new renters, and if you will owe money to leasing agents.
- Is it a bad time of the year to put your property up for lease? Could you extend their lease, at the lower amount, for part of the year, until the timing is better for you?
After doing some quick math, you may decide that it’s more cost effective to have the tenants stay. Or, if it’s a hot market, you may choose to let them go.
In my third example, the market hadn’t changed, and I likely would get the same amount of rent that they were originally paying. If I told them no, and they left, I would be facing a month (estimated) with an empty property, and losing another month’s rent to the real estate agents working to lease the property. Let’s say that the monthly rent was $2500. I would likely lose $5000 changing tenants, and that’s not counting utilities and basic repairs/painting that would also have to be done. My costs would likely approach $6000. Compared to losing $100 a month, I would be looking at roughly 5 years to break even with new tenants. The math was clear, and I let the tenants stay with the reduced rent.
Another approach, of course, is to offer a lease extension without a reduction, or with a smaller reduction. The renter could of course just be “testing” to see if he can get a rent reduction, but will stay regardless (moving costs the tenants time, money, and causes a boatload of stress). It’s likely that you won’t know what your tenant is really thinking, so please run numbers and see what your situation will look like if the renter does move on.