How To Cope With Rental Discounts

Rents Go Down

There's no doubt rents are going down, and while this time of year is always grim and hard to find good tenants in, we are seeing rent prices from 2-3 years ago.

In this market it is inevitable that tenants will also notice, given that there are articles in every newspaper about the softness in the rental market, and our tenants will either leave or ask us for a rent discount.

This is not a situation that I have ever dealt with in my career, the rent trajectory has always gone up in the GTA.

Step 1 - Be Smart With Rent Increases

We are a property management company, so we traditionally automatically send out rent increases. If it's a problematic tenant and you want them to leave by all means send it out. In this market, you'll want to consider if the tenant is already paying above or market rent before you send out the increases.

If the tenant is paying above market do not send out an increase. Increases are designed so the tenant can have 30 days to think about the new rent amount and if they don't want to pay it, they can then give you 60 days notice. Tenants are like everyone else, busy surviving. They are just trying to get the rent together for you, not necessarily evaluating the rental market and seeing how much they can rent for less in the same building.

Turn Overs - Expensive

You want your tenant to stay if you can because vacancy is the worst expense. You will never get that money back. Every month that goes by while you price discover is a complete waste starting with the month they vacate, unless you manage to rent right away which is difficult. The rental market is unforgiving if you price your rental wrong, no one will come see it, and it will remain unrented until you change your price.

When the unit becomes vacant, you'll also have some small fixes, and possibly repainting and definitely some cleaning all of which costs money.

I once calculated with a month of vacancy and a paint job you have to increase your rent by $500 per month to make it worthwhile to kick out an existing tenant and rent to a new one.

Step 2 - Discounting Your Rent

The tenant that asks you for a rent discount is doing you a favor because they have looked at the market price, and they are potentially going to save you vacancy expense and turn over cost.

If you don't like the tenant just say no and hope they leave.

If the tenant is decent, as most of them are, it's time to sharpen your pencil.

Step 3 - How to Determine the Amount of the Discount

First, ask your tenant what they think is a reasonable discount and tell them you'll get back to them. Ask them to send you listings they are basing their discounted price on. It's not uncommon for realtors looking for business to send out emails like... Mississauga Downtown from $1800-$3000. Obviously there are very few $1800 listings and this is not a realistic price to base your discount on.

The easiest is to use realtor.ca as they have a lot of listings in many areas. Look and see what the lowest comparable listing to yours is and see what the range of prices are. Say there is 2 one bedrooms available in your building and 3 one bedrooms in the buildings next door. Realtor also tends to be higher priced than the myriad other websites.

You'll want to use the lower range as your anchor, and not the overpriced listings that are inevitably wasting around for months and months and months. Let's say you see one unit for $1800 (looking for a bidding war/not available) but a couple in the $2100 range. If your rent is $2500 you're stuck between a rock and a hard place.

Your tenant may want a discount of $300. While I know that your mortgage and maintenance fees and insurance are up the rental market doesn't care. Better to agree and keep the good tenant than say no to them, have them move, try for 3 months to get $2500 again and rent the place for $2100 4 months later.

Step 4 - Don't Take this Personally

No one likes a pay cut. NO ONE. Bottom line is, market conditions have changed and we need to change with them and the quicker we get with the program, the less we lose. Your tenant is actually doing you a favor by saving you turn over costs.

Step 5 - Real Estate is Slow Gains

The days of double digit appreciation is definitely over, but as long as you can keep the place rented, and the mortgage paid, inflation and leverage is doing the work for you.

Lets Hope For Better Days...