Discounting your rent – has this happened to you?

In a previous article I wrote about the dangers of the current market resulting in lower rents for property investors. Here’s an interesting story about challenges faced by investors in an ‘over’ supply of vacant rental properties.

Clients of mine recently completed the purchase of an off-the-plan apartment. Like many other people who also had bought into the same building, my clients bought with the intention of renting it out as an investment property once the apartment was completed. The contract was subject to the building being built and the apartment being registered some time in the future, and it’s not surprising to see these contracts to run for 2-3 years.

In my clients’ transaction, the building was completed a month or two before Christmas and all buyers (including my clients) were required to complete within an agreed number of days (as specified in the contract) basically meaning everyone became owners at the same time.

What happened next goes something like this (edited and paraphrased for dramatic effect):

“The weekend after settlement was just like a market. There were people everywhere!

There were literally tour groups of tenants being shown through all levels of the building. Tenants could pick and choose an apartment, whether it was one bedroom or two bedrooms, garage or no garage, balcony or no balcony…

At least 75% or so of the apartments had been bought by investors, and because everyone settled at the same time they all put their apartment for rent – all at the same time as well! There were lists of available apartments and all the tenants had to do was to tick a box for what they wanted and write their name down.

The managing agent told me that if we didn’t lower our rent, other owners would – and so we’d run the risk of missing out on securing a tenant. Sure enough, other owners were dropping their rent or were offering other incentives just to get a tenant to sign.

We weren’t interested in lowering our rent and we really didn’t want to compete with everyone else either. So we decided to wait a bit and hold off putting our property on the market until things quietened down a bit.

Unfortunately, as it came closer to Christmas and mortgage repayments started to come in, we eventually agreed to rent it out lower than what we had originally wanted, but at least we managed to get someone in.

When I last looked there were many other owners still trying to get a tenant, and I’m not sure if sure if those places are vacant. As for us, it wasn’t perfect, but we’ll have to see what happens next time and maybe think more carefully as well…”