To reduce the rent, or not to reduce the rent. That's the question. If you've had a vacancy for some time and aren't reliably getting rental applications, reducing the rent you want to charge for a property on the market might be just what the doctor ordered.
It's a simple tactic, but one that can be a huge financial benefit in the long run if you do it right.
Cutting your rent by, say, $30, will put you in the financial green if it helps you find a tenant just 1 week faster. There's always the potential that you could've made more money over the year, but you've reduced your risk and secured stable income earlier.
At the same time, you don't want to jump the gun and charge less if you don't have to. So when should you stick it out, and when should you fold?
We've made this article to help take out the guesswork by explaining exactly what to look for and when you should consider reducing the rent. We'll also explain by how much, and how you handle rent reduction requests so you can maximise the returns on your investment property.
When should you reduce the rent for a property on the market?
Numbers don’t lie. That’s why you can be sure that reducing the rent will almost always be more financially beneficial than having an extended vacancy. It helps you minimise your risks and secure a stable source of income sooner rather than later.
You should consider reducing the rent in the event of:
- Competitive listings offering the same price while also offering more amenities or lower price with the same amenities.
- Going 6-7 weeks without a tenant.
- Receiving less than roughly 2 applications a day on average
1. When you want to keep your rental property competitive
Making sure that your rental property lines up with other offerings in your market is probably the most important point you should take away from this guide.
Say you’re charging $500 for your rental property but there are similar properties just down the street going for $450. It’s a safe bet that prospective tenants browsing rental listings would take one look at that comparison and dismiss your property without a second thought.
Or, say there are other rental properties in the area that boast:
- Built-in wardrobes
- Air conditioning
- Internal laundry
All things your property lacks but which neighbouring rentals have installed in their recent renovations.
Put yourself in the shoes of a tenant looking at rentals online, and think about how they evaluate their options, including your rental property.
If you’re going to have any chance of raking in tenants, save for renovations, reducing the rent should be your first consideration. You need to align it with what else is out there so that you're staying competitive.
2. When your rental property has been vacant for too long
Alternatively, looking at how long your property has been on the market is a good way of assessing if a rental reduction is the right way to go.
But exactly how long is too long?
If your rental property is starting to go way past the average time a home should be on the market then reducing the rent might be the right way to go.
For example, recent figures pulled from the Domain database show that the average time a rental home is on the market in Sydney has gone up 15%, from 43 to 50 days.
Let's say that your rental property has been on the market in Sydney for over 60 days, or even it's been 45 days but you don't have any shortlisted applicants.
Both of these situations are clear indicators that you should reduce the rent on your listed rental property.
3. When you’re not getting enough rental applications
A large bulk of rental applications should come within the first few weeks of your property being on the market, but if you're getting a low amount of applicants as a baseline, you might have set the wrong rent on your investment property.
2 to 5 applications per day on average is a good indication that you're getting a healthy amount of interest.
Keep in mind that there's plenty of other factors in play that could cause the lack of clout on your investment property.
- Have you invested in professional photography?
- Is your description doing a good job of highlighting the amenities and location of the rental?
- Do you have the renovations tenants really want?
It could very well be that investing in professional photography for your rental property is the bump your property needed or that you just need a touch-up on the description.
The clue here is that you need to pay attention to a multitude of factors while you take a gander at what else is on your market.
If your rental property ticks the boxes to standing out in the market then reducing the advertised rent is a sound decision if you're lacking interest in the rental.
We recommend you read through our guide on how to make your rental property stand out to get a better picture of how you can make sure your investment property is up-to-par with other offerings tenants might consider.
How much should you reduce the rent on your rental property by?
Unfortunately, there’s no all-encompassing answer to this. It really depends on your particular set of financial circumstances, such as your loan repayments, investment strategy, cash flow and so on.
If it is the case that properties in the area have added some new features which have boosted their price, you could consider reducing your rent by the amount those other properties have added through their renovations and amenities.
Here’s a rough guide:
- A built-in robe can add $5-10/week
- Air conditioning can add $10-20/week
- Internal laundry can add $10/week
- Parking can add $30-$60/week
Apart from just listing up the difference in features and amenities, the amount that you should reduce the rent by is something you'll have to discover through trial and error.
If you're short on applicants, try reducing the rent by $30 and see if that helps. If it does, great! If it doesn't, maybe try reducing it by another $30.
If you overshoot, that's fine. It means that you get a good tenant now and you can adjust it accordingly next time you're looking.
Remember, earning a little less each week is far better in the long run than pricing yourself out of the market and earning nothing at all!
But if you really want a personalized answer, then it’s best to seek expert advice from a property leasing manager. A good property manager has dealt with hundreds of properties for lease throughout their career. They'll be able to assess the issues with your rental or your advertisement and help you get a healthy amount of applicants according to your financial goals.
How to handle a rent reduction request
There are a fair few rental obstacles you might encounter over the life of your investment – and a rent reduction request from a tenant could be one of them.
Just like the other scenarios, dropping your rent a bit can prove the better option than having a bare property earning you nothing. But how do you go about negotiating a rent reduction that’s fair for you and the tenant?
Well, here's a few important things to consider if your tenant sends you a rent reduction request:
- Keep everything in 'good faith' negotiations. The Tenant's Union NSW has clear guidelines on this.
- If negotiating a rent reduction proves unfruitful between you and your tenant, there's always the option for either of you to submit the issue with Fair Trading. They'll act as a mediator in trying to come to a mutually beneficial outcome.
- The rent reduction has to be based on facts and evidence. The tenant should be communicating that there are other rentals nearby of similar appeal but at a lower price.
- If the tenant is requesting a rent reduction due to financial circumstances, get this verified. Of course, not everyone wants to share their financial statements. Something like a signed letter from their previous employer who laid them off is great and easy to collect.
- You can raise it later: Even if you do go ahead with reducing the rent, it doesn’t have to stay at that rate forever. In NSW you can increase the rent every 12 months. So, provided the economy is fairing well, you can go ahead and bring the rent more in line with market trends.
The general philosophy when you're dealing with rental reductions, whether while your rental property is on the market or during a tenancy, is that taking a minor hit now to mitigate a vacancy will almost always be worth it.
Like what you just read? There’s a lot more where that came from.
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