If I had a dollar for every time a landlord says, ‘I charge my tenants cheap rent because they are good tenants,’ I would be a wealthy man.
As if anyone less than good should be considered. A good tenant pays in full and on time and looks after the property. These behaviours should be normalised (not ‘celebrated’ or ‘compensated’). I am not sure why anyone should expect any less from a tenant.
On the face of it, discounted rent makes good business sense, but I see it as a fundamentally flawed model that keeps landlords in a rut:
- A well-located and well-maintained house will also command a higher rent than others;
- The assumption is that reduced or cheap rent keeps tenants from moving; I don’t think that is right. If comparable properties cost the same to rent, then moving could only be more expensive for tenants (relocation costs). And if the cost disincentive is already there against moving, then wouldn’t you just be taking an income hit for no reason?
- More time and effort should be spent attracting and selecting the right tenant. If discounting is your only strategy, then the odds are your marketing and selection processes are broken;
- If you treat your tenants like valuable customers, you should be compensated accordingly. Premium product coupled with premium service means premium price. I don’t know why any landlord should treat then tenant as less than valuable customers;
- Future-proving the property means timely repair, maintenance, and a sinking fund for future works. Throughout your property ownership, you’ll probably have to replace the roof, re-carpet, paint (multiple times) and more. These are not small ticket items, and the money has to come from somewhere;
- With interest deductions being phased out and the removal of other tax write-offs in the last two decades, the cost of rental property ownership has soared. An appropriately priced rent can alleviate the additional tax burden;
- This one is for the negatively-geared investors: Cash flow is the lifeblood of any business. You can’t buy groceries or service your mortgage with equity. If your rentals are not generating a sustainable level of income, then are you even investing at all?
- Look at the bigger picture and your opportunity cost. Say you discount rents by $20 for five tenancies with ‘good’ tenants. You are not just giving up $100 a week; the $5,200 annual income could be the difference between securing and losing out a new loan for another property; and
- Under renting your property has a ripple effect on the rents in your area. Market rent is an aggregate of what comparable properties in an area charge. By dragging down the average, you are denying other landlords from appropriately offsetting the cost of their rental businesses. Providing further rental housing would make even less financial sense in the long run.
All things considered, I can’t see how discounting rent could lead to any real tangible benefits for the landlord. I wouldn’t do it. Would you?
Toby is a private landlord and a long-time member of the APIA.
Guest posts reflect the views/opinions of their contributors and not necessarily of APIA.
An excellent exposition..