Locking In A Tenant

October 16, 2015

 

When holding an investment property, the majority of investors need to have their property tenanted in order to cash-flow the investment. Without a tenant the investment can create a considerable squeeze on their financial position. Lenders and regulatory bodies around the country keep their eye out to prevent investors from biting off more than they can chew but still, having an empty property can become very expensive.

 

The question is, if tenants are tough to come by in a given market, what should investors be willing to accept in order to keep rent coming in?

 

The first line of attack is to do your best to invest in markets with an undersupply of rental property. If there is a shortage then it should be easier to find a tenant. One of the indicators would be to check the vacancy rate of the suburb. If the vacancy rate is above 3% and there are no considerable infrastructure projects in the near future take a step back and re-evaluate. It could still be a great deal, just be sure.

 

Spikes in a suburb’s vacancy rate can happen when large (or multiple) developments come onto the rental market. In this instance it may seem like the only way to fetch a tenant is to lower the rental to seem desirable. One issue here is that by doing so you reduce the comparable value of the whole building / suburb and don’t do yourself (or your neighbours) any favours in the future. Run the numbers and consider what alternatives may suit your situation.

 

Alternative 1: Be flexible with the period of the lease you are offering. Some tenants can only commit to a shorter lease period or want the security of a longer lease period.  By being flexible you may get a tenant in the door sooner and reduce vacancy.

 

Alternative 2: Give the tenant some period of time rent-free upfront. Make sure you run the numbers and consider the implications of having your property empty for a period of time: losing 2 weeks upfront, may be worth locking one in for 12 months.

 

Alternative 3: Accept a lower rent but only for a shorter period. If there is a short spike in vacancy rate then you may just need to ride it out. In that case consider accepting slightly lower rent but set the period of tenancy to end at the time of year when rental demand is the highest (your property manager should help with this analysis). 

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