Rent Reduction vs. Rent Credit: Which Strategy is Best in 2021?
In 2021, one prominent trend facing multifamily owners will be continuous rent reduction requests made by tenants. In a market besieged by high vacancies and an oversupply of apartments, renters recognize this unique opportunity to pressure landlords to reduce rents – some agreeing to temporary reductions, while others push for more permanent ones.
Its critical for landlords to understand the weight of these decisions; any reduction – short-term or long-term – can and will greatly impact cash-flow and overall value of your building, so distinguishing between the two is a must.
Rent Reductions
Rent reductions are permanent; the landlord and lessee agree to a new fixed term at an often drastically reduced rental amount (Wellington Property Company reports anywhere from $200-$1000 less than the current rate). This can be beneficial to an owner who values, and wishes to continue, the working relationship with their tenant. More importantly, it avoids cash-flow interruption and any costs associated with vacancy: turnover, repairs, marketing, leasing expenses and lost rents.
Keep in mind, when you agree to this agreement, the glaring trade-off is an immediate devaluation of the asset.
Less rent = less cash-flow = less value
In complex, rent-controlled markets like Oakland and Berkeley, it might be years before your next opportunity to recoup the losses. Understanding the consequences of this permanent decision will require a higher tolerance for risk along with a higher degree of patience, so be sure this aligns with your holding strategy.
Rent Credits
In comparison, a rent credit is a temporary concession, allowing for a short-term discount (typically 3-6 months), with the eventual reversion to the current rental amount. While this gesture demonstrates your willingness to cooperate with the tenant, the obvious benefit is protecting your in-place rents by buying more time for the market to stabilize.
Less rent today, same rents tomorrow = protects value
So What Strategy is Best in 2021?
We put together a list of 5 factors to keep in mind to help you decide the best way forward:
Time of Year/Season
Historically, the best time to rent apartments is late spring, early summer. If your tenant is threatening to vacate without a reduction, try to extend them to early May, mid-June. Adjust the timing as needed if the unit requires 1-2 months of repairs, remodels and upgrades. While it might make the most sense to appease the tenant and keep them in place, make sure any agreement takes timing into account.
Opportunity vs. Setback
Is a potential vacancy a value-add opportunity or will it set your investment back? Has the renter been occupying the property for 10 years at below-market rent, or is this a recent tenant paying pre-COVID rent? It may seem obvious, but older tenancies might be a welcome parting, while newer tenancies will require more concessions since they may be paying above current market rents.
Quality of the Tenant
Does the tenant pay their rent on time and in full? Have you had easy dealings with them in the past? Depending on the history and relationship with the renter, you may want to make an extra effort to keep them happy and comfortable, or risk finding someone new who may or may not be the better option.
Optimism vs. Conservativism
How optimistic or pessimistic are you about the market rebounding? Maybe you rely on the income and would rather play it safe. Either way, your instincts and comfortability level will help guide you.
Timeline
All decisions will need to align with the big picture. If you intend to sell within 2-3 years or sooner, protect your in-place rents and keep income as high as possible. If you intend to hold for 7 years or longer, your willingness to wait out the storm and be patient will override short-term concessions.
In summary, while we are all in this together, its important for landlords to make mindful decisions relating to income properties. Concessions may seem inconsequential in the now, but can have a significant impact on your equity metrics.