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Why You Should Reduce Your Rents
| | Monday, February 22, 2010 @ 09:31 PM EST
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Contributed by: Jason Hanson
Jason Hanson Properties
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Yes, sometimes it is smart to reduce your rents. And I just recently reduced the rent on one of my rental properties. Let me explain how this came about and why I did it. I have a townhouse in Fredericksburg, VA and I have had excellent tenants in there for the last two years. This townhouse is in my buy and hold portfolio so I don't plan on selling this place for 30 years or so.
Well, the tenants lease is about up and I got an email the other day stating they would love to continue to live there, however they would need a reduction in rent. Otherwise they would be forced to move. They also explained that like many Americans they are struggling financially.
So after I got this email I first took the tenants into consideration. They always paid their rent on time, never gave me any problems and are essentially "dream tenants." Next, I looked at my current rent on the property, which is far above market rent. I was able to get a premium on rent because these tenants have pets and because I always advertise my properties high and come down on rent if they don't quickly get rented out.
After that I started running the numbers. The rent on the place is $1,500 per month and the tenants wanted a reduction to $1,400 a month. Over the next year that means I would lose $1,200 a month in rent. However, I know if I have a vacancy I will have to send someone in there to at least clean the place which will cost me $300. If I had to clean the carpets and do more repairs, it would obviously cost more, but I'm going to make the math easy and just say $300 for a general cleaning.
Then I have to figure that on average it takes me 60 days to fill this type of property. That means I would lose two months rent at $1,500 equals $3,000. Add the $300 in cleaning fees and it has now cost me $3,300 to have these perfect tenants move out and put a new person in the house. So is it better to lose $3,300 or just $1,200 by letting the tenants stay there with the reduced rent?
Of course it's better to let the tenants stay there. Now, if the rental market was stronger and houses were hard to come by then I might not have done it. But in this area today there is a lot of competition to get rental properties filled and I know I made the correct decision.
If this ever happens to you, make sure to run the numbers and see if it is smart to reduce the rent. Every house is a case by case basis so sometimes it might make sense and other times it won't.
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