What Are Rental Concessions?
A rental concession is a compromise a landlord makes to the original rent terms in the hopes of finding a tenant quickly. They are usually some form of a rebate that a landlord offers a tenant to try to persuade the tenant to move into the rental property. It could be monetary compensation, some type of a discount, or a physical good or service.
The theory is that the value of the concessions is less than the value of having a tenant move into the rental quickly, thus avoiding a vacancy and accompanying vacancy costs. For example, if you offer a tenant $100 off of their monthly rent for the entire year of their lease, they would be saving $1,200 for the year. If the monthly rent was $1500, you would come out ahead by $300 because the reduced rent would allow you to find a tenant without having to deal with a vacancy for the month. You would also be saving additional money on marketing costs and vacancy holding costs, such as heating the unit.
Examples of Rental Concessions
There are endless options for rental concessions. Some of the most common rental concessions include:
- Free Month of Rent: One type of concession is to offer a tenant a free month of rent. To hedge against early tenant move out, this free month would usually be the last month of the lease contract. For a yearly lease, the tenant would pay the normal rate for the first 11 months, and for month 12, would pay nothing. After the original lease term is over, the tenant would be responsible for paying the full rent amount each month for any additional lease term signed.
- Reduced Rent: The landlord can decide to offer the tenant a rental discount instead of a rental concession. This would be a reduction in the monthly rent if the tenant agrees to move into the rental before a certain date. For a yearly lease, the tenant would be able to pay reduced rent for each of the 12 months. Instead of paying $1,000 a month, the tenant may pay $925.
- Reduced Security Deposit: Another option would be for a landlord to reduce the amount of security deposit that is required. Instead of one and a half month’s rent, the landlord could decide to only collect one month’s rent. For example, if the monthly rent is $1,000, the landlord would only collect $1,000 as a security deposit instead of $1,500.
- Help With Moving Costs: Another concession could be helping the tenant with the costs to move into the property. This could be paying for a moving truck, a storage locker, or paying for the moving company the tenant would like to hire.
- Upgrades to the Rental Property: Another option would be to offer the tenant an upgrade to their rental unit. This could be a new countertop, newly tiled floor, new vanity, new appliance, or new light fixtures.
- Payment of Broker’s Fee: If the property is listed with a realtor, the tenant will usually be responsible for paying the broker’s fee. If the tenant moves into the rental quickly, the landlord can offer to pay this fee.
- A Good: The landlord could offer the tenant a good, such as a free television.
- A Service: The landlord could offer the tenant a service, such as a free year of Netflix.
- Free Access to Amenities: If the property has amenities, such as a gym, pool, tennis court, parking space, laundry, or a storage unit that the tenant would have otherwise had to pay for, the landlord can offer this amenity to the tenant for free as part of a rental concession.
Times to Use Rental Concessions
In a strong rental market, rental concessions are not common. Rental concessions are more commonly used:
- To Fill a Vacancy Quickly: Landlords will offer incentives when they want to get a vacancy filled quickly or when they have had a prolonged vacancy that they have not been able to find a tenant for.
- Lease Renewal: A landlord may offer a tenant a concession when the tenant’s lease comes up for renewal in the hopes that the tenant will renew their lease instead of moving out of the rental property.
- Sluggish Rental Market: When there are more available units in an area than there are interested renters, a landlord may offer a concession to attract these renters to their property.
- First Coming to Market: When a landlord has a larger rental property that they are renting out for the first time, it is common for the landlord to offer a concession, such as a free month’s rent, in order to get the majority of the units occupied quickly.
Pros of Rental Concessions
- Fill Vacancy Quickly: The first benefit of a rental concession is that it allows landlords to find tenants to fill vacancies sooner.
- Decreases Vacancies: If landlords in the area use rental concessions to get their vacancies filled quickly, the occupancy rate in the area will increase. This will lead to fewer vacant units and thus fewer options for tenants looking to rent. With greater demand, this will hopefully drive rental prices up in the future.
- Certain Concessions Expire After Original Lease Term: Concessions are a way to attract tenants to your property. Concessions such as a free month of rent, free parking spot, or free access to an onsite gym usually expire after the initial lease term. Other concessions, such as reduced rent, do not expire. In these situations, you would have to serve notice of rent increase or collect an additional security deposit.
Cons of Rental Concessions
- When to End Concession: Most reasonable people do not expect to get a free month’s rent every time they sign a lease. Other concessions can be more difficult to take away. For example, if you offered the tenant a free parking space for their first year and now want the tenant to pay for space after the initial lease expires. The tenant may get upset that they now have to pay for something that was once free and may look to find another apartment.
- Raising the Rent: If you have offered a reduced monthly rent to a tenant, you will have to serve the tenant with a notice of rent increase when their lease expires. You could also sign a new lease with the tenant with a new rent price. The tenant may not be happy that their rent is going up, so may look to move out of the unit.
- Security Deposit Concession and Damage to the Unit: If you have offered a reduced security deposit or have not collected any deposit from the tenant, you are putting yourself at risk if the tenant damages the property or does not pay their rent.
- Tenant Turnover: Tenants who move in because of a concession may move out once that concession expires to look for another property with a similar rental concession.
- Attract the Wrong Type of Tenants: Rental concessions may attract tenants looking for a freebie. These tenants might stop paying their rent or could break other terms of the lease, and you will have to deal with the eviction process.
- One way to hedge against this is to put a clause in the lease that states if the tenant moves out before the lease term, the tenant has to pay back the full amount of the concession. If their security deposit was reduced by $500, they would have to pay the landlord back this $500.