How to Handle Tenants Who Demand Lower Rents

Many tenants are approaching their landlord and threatening to vacate the rental property unless the landlord lowers the rent. Fair enough. Tenants after all, cannot be blamed for using this volatile economy as an opportunity to try and lower their costs.

Given, however, the adverse effect it would have on the real estate investor’s investment—such as cash flow, present and future value of the property, and the investor’s ability to borrow against the property—to merely cave-in to tenant demands and lower the rents would not be a prudent real estate investing decision. The smarter approach for income property owners would be to do some research in order to determine if the tenant is really in as strong a bargaining position as they think.

1) See what sort of properties and offers are actually out there. Tenants commonly make assumptions about what they can get elsewhere without really understanding the details. What they deem to be a better deal elsewhere may in fact be a misconception. Always stay current with your market so you can overcome tenant objections as they arise without harming your investment.

2) Understand the motivation behind tenant unrest. What are your competitors offering that has caught the eye of your tenant? In this case, ask them. But here again be preemptive. Perform a couple of comparisons on competing properties to understand what sorts of terms and discounts or incentives are being offered so you aren’t caught flatfooted and can work it out with your tenant reasonably.

3) Work out the numbers. Be aware of what it will cost you if your tenant vacates, the time it is likely to take to find a new tenant, what it could cost to get the unit rent-ready, the incentives you may need to provide to be competitive in the market, the difference between the rent you are getting now and this potential new rent, and all other costs you might incur to re-rent the unit such as agents fees and marketing expenditures.

4) Recognize why a tenant might not want to move. In addition to the other negotiating strategies, bear in mind that tenants are generally aware that moving is expensive, and like most us, don’t relish the idea unless it really is necessary or the savings outweigh the true costs of the move.

5) Establish an acceptable negotiation range. Use your market research to determine what would give you a great, fair, and poor result. This way you can come to the negotiating table prepared, informed, and confident when a tenant demands lower rent.

Preparation and information is the key to making good real estate investing decisions and crucial to a more favorable outcome with tenants seeking a rent reduction.