Renting out investment properties is smart, but not when you’re giving your profits away to your tenants for no good reason. If you’re cutting deals for your tenants, that’s exactly what you’re doing, and here’s why you should stop.
Tenants will start taking advantage of you
Whether you’re renting commercial or residential property, tenants will take advantage of you if they feel like they can get you to give them a break. Once you give someone one deal, there’s a good chance they’ll start looking for other deals they might be able to get from you. For example, if you let them slide with late rent that doesn’t come in for a week after the due date, they might not worry about being late next month even if they don’t have a reason.
Once you set the tone for a casual relationship, your tenants will follow suit, and relax about finances, and the result can be that you simply don’t get paid on time or in full. Your tenants might start to assume you’ll be easy on them no matter what they do. They might even start breaking small lease agreements just to test the waters.
Deals create implied expectations
Whether or not you give a tenant the impression that deals will continue, they could interpret your first deal as an implication that future deals will exist. This is where you’ll need to use solid communication skills and ensure you only offer what is written into the lease and nothing more. You will need your lease agreement to fall back on, and if you’re cutting deals that go against the lease, your tenant might think you’ll make additional exceptions for them.
For example, say your lease includes a rent escalation clause that states the rent will gradually increase by 3% every year. If you’ve been giving tenants a deal on rent, late fees, or anything else, they might automatically assume the rent escalation clause in their lease is negotiable, too. To learn more about rent escalation clauses in commercial real estate leases, click here.
You will lose significant money long-term by cutting deals
If you’ve already been letting a tenant slide on annual rent increases for a year or more, you’ll have a much harder time getting them to start paying any increase, and when you do, you’ll be far behind in terms of how much rent you’ll be collecting. For instance, say your tenant pays $4,500/month in rent. If your tenant hasn’t been required to pay a 3% increase in two years, you’ve already lost $274 per month, or $3,288 per year for a total of $6,576.
Here’s what your rental income would look like if you implement those 3% rent increases each year for two years in a row:
Year 1: $4,500/month rent
Year 2 with 3% increase: $4,635/month rent ($55,620/year)
Year 3 with 3% increase: $4,774/month rent ($57,288/year)
If you wait and only start charging a 3% increase at year 4, you will continue to lose $3,288 per year because of the previous increases you ignored. After a decade, that’s $32,880 lost, all because a tenant wanted a deal. The longer you allow a tenant to slide without implementing a rent increase, the more money you lose.
A deal can backfire in court
Even though your lease agreement is legally binding, if you start making exceptions for your tenants, a judge might interpret that as a change in the terms of your agreement, especially if you’ve sent your tenant emails or texts about the situation.
If you end up providing a deal that doesn’t work out, and you want to change your mind, you’ll have a hard time getting a tenant to go with those changes. For example, let’s say you tell a tenant not to worry about paying late fees because you know they’re going to get you the rent eventually. That tenant might start taking their time to pay rent far beyond a reasonable amount of time, taking advantage of your unwillingness to collect late fees.
Skipping the late fee may have been your deal when they were just three days late, but what happens when they’re three weeks late? You can try to collect a late fee, but if you’ve already told them they don’t need to pay any late fees, you’ll have a hard time getting that money. If you end up in court later and try to sue for lost late fees, a judge might not award you the fees you said your tenant could skip.
Don’t use deals to get tenants to rent from you
One of the biggest marketing mistakes you can make is offering deals to get tenants. Whether it’s free rent for a month or a discount on rent, it’s a bad idea. It doesn’t even matter if your deal is just a numbers game that doesn’t save tenants any money in the first place. When you advertise free or discounted rent, you are setting yourself up to attract low-quality tenants who are just looking for a deal.
If you end up signing a lease with a tenant who only chose your property because it would save them a few thousand dollars, chances are high that they won’t be your best tenant.
You won’t win by giving deals to tenants
The bottom line is that giving tenants deals doesn’t give you any advantage. There will always be people willing to pay the full rent price, so cutting deals will only reduce your profits and extend the time it takes to pay off your mortgage.
If you have a great tenant you’ve never had any problems with, that’s different. If an otherwise wonderful tenant asks for an extension on the rent or to forgive a single late fee payment they can’t afford, it’s worth consideration. However, don’t start a relationship with a tenant by giving deals and cutting breaks. If you do offer a deal, you want your tenants to feel like it wasn’t an easy decision and it’s not something that will ever happen again.
You invested in property to make a profit, so don’t start giving deals that will tank your profitability. Instead, invest your time in acquiring high-quality tenants who will rent from you long-term and take care of your investment.