Renewal incentives for great tenants are often worth the investment, but what is the best way to give tenants a discount? This video with Rentec Direct’s Kaycee Miller looks into rent reduction vs. a one-time rent discount and tells you about the smartest way to navigate keeping the tenants you love.
Looking for ways to reward your tenants, capture a lease renewal, or even, find a new tenant for a vacant rental property? You might be considering reducing the rent, but another viable option is offering a one time rent discount.
In this video, I share my advice on how to handle a rent discount vs a one-time rent reduction as an incentive to encourage your tenants to renew their lease for your rental property. When you run the numbers, it’s clear which option makes the most sense.
Lease Renewals: Rent Reductions or One-Time Rent Discount – Video Transcript
I get asked all the time, “Hey, do you have any advice for this rental situation?” And that’s what we’re here to do. I’m always happy to share my opinion. My name is Kaycee. I work for Rentec Direct property management software. I’m also a landlord, a real estate investor, and have multiple properties throughout Oregon.
I’m here to share with you some of the tips that I tell my friends whenever they have a landlord question.
So let’s dive into this series called: What would a landlord do?
How to get a renter to renew their lease
The other day, I had someone present the following scenario to me:
They had a long-term tenant that they wanted to renew their lease, and wanted to know the best way to get their tenants to extend their tenancy. My friend had the idea that they could give a rent discount each month, in the form of a rent reduction, throughout the entirety of the lease.
Right away bells went off in my head!! (DING DING DING! I don’t know if that’s the best idea.)
Let me explain why.
Is a Rent Reduction a Good Idea?
When you think about giving a rent discount, that means over the course of the year, or however long the lease is, your tenants are going to be paying a reduced amount throughout the entirety of that lease.
Let’s break this down further.
Imagine you are charging $1,500 a month in rent. You like your tenants and want to reward them, and hopefully encourage them to renew their lease with you. So you reduce their monthly rent by $200 if they sign another lease for the following year.
But now, instead of receiving $1500 a month in annual rental revenue, you’re only collecting $1300 a month annually.
This rent reduction will result in a rental income loss of $2400 compared to the previous year.
Alternatives to a Rent Reduction: One-Time Rent Discount
Is there a better choice a landlord can make to incentivize a lease renewal without losing $2400 in the deal?
What I think is a better idea, if you really like your tenants and you want to incentivize them to do a lease renewal, is to offer a one time rent reduction. A one-time rent discount of $500 as a lease renewal bonus could be really enticing for your tenants. And as a benefit to you, you would only experience a $500 loss instead of $2400.
Rent Reduction Long Term Impact and Risks
If you reduce your rent, not only will you reduce your annual rental income but you could risk putting your rental rate so far below market rate that raising it back to market rate would be unaffordable, or even illegal.
In our example, let’s go back to using $1500 as your market rent. You wanna do something nice for your tenant, so you reduce the monthly rent to $1,300, making your property $200 below market rent.
What happens the following year when market rent increases in your area and is suddenly $1700. You’re property that was once only $200 below market rate is now $400 below market rate. If you wanted to increase the rent to return to market rate, you’d have to issue a $400 monthly rent increase, which could be unaffordable to your tenants.
In some cases, it might be illegal to raise your rent from $1300 to $1700. In Oregon, landlords can only raise their rent annually by a maximum of 10%. In this example, a landlord would only be able to raise the rent by $130, bringing the monthly rent up to $1430, still below the original $1500. It will take a long time to get it back up, if ever, because of that rent increase cap that we have in my state. Prior to raising your rent, or even considering a rent reduction, always check your state, local and federal laws to ensure you are in compliance.
Reward Tenants with a One-Time Rent Discount
Think about the long-term benefit over time. If you’re really just trying to reward your tenants or get them to renew a lease, think about a gift that will have a minimal impact on your bottom line over time, but could still have a positive impact on your tenants.
When considering a lease renewal incentive and reward for your good tenants would you rather offer a rent reduction or a one-time rent discount?
Once again, I’m Kaycee and I am happy to share with you landlord tips and advice on how I’ve managed my rentals in Oregon. Find more landlord tips on the Rentec Direct Blog provided by Rentec Direct property management software.
