Everything You Need to Know About Rent Concessions
Updated: Nov 11, 2021
Rent concessions have made a comeback into real estate trends. Many industry experts now believe it's a normal part of the transaction process. Most landlords are more than happy to throw in a discount to sweeten the deal and get the tenant to stay for the long haul.
Every seasoned landlord will agree that concessions and incentives are a far better alternative than rental vacancies that can create a hole in their bottom line.
It's a great strategy to hedge against the tenant moving out early, especially if they are known for making timely payments and not causing any problems.
Type of Rent Concessions
There are a few popular rent concessions that may appeal to both landlord and tenants.
One Month Free Rent
Who doesn't like free stuff? Every tenant will get excited about not having to pay the first month's rent, and while this means you'll have to eat up the loss in the first month, the benefits of having a great tenant outweigh any losses. Moreover, it's a common incentive for tenants to renew their lease.
Landlords can also offer the first month for free if they know that the tenant has already exhausted their budget associated with moving expenses and security deposit. Alternatively, you could offer a free month to convince the tenant to stay longer.
This could be written into the lease. For example, in a yearlong lease, the tenant only has to pay for the first 11 months and gets a free month at the end of the contract.
Moving can be a very stressful experience for tenants if they have a lot of items to carry. You can offer help to your tenants by reimbursing the costs of brokers, movers, renting a storage unit, and hiring moving trucks.
Rent Reduction (or rent relief)
You can offer reduced rent as a short-term solution for tenants struggling to pay their rent. You can also offer a long-term reduction to tenants if they sign a multi-year lease or are about to renew their lease. Long-term concessions are useful for landlords who would rather avoid the expenses associated with rental vacancies.
Besides, it's good to help out tenants who are suffering from a job loss or work-hour rollbacks.
Security Deposit Reduction
Renters who have used up their budget due to moving and transport fees will be more than happy to sign a lease agreement if it offers discounted security deposit. Cash deposits, on the whole, are harder to manage for tenants if they are bogged down by multiple expenses. However, landlords should proceed with caution because they will have access to fewer funds if the tenant damages the unit during their stay.
Landlords can further sweeten the deal by throwing free amenities such as Wi-Fi, parking spots, laundry areas, storage units, and similar concessions. If rental units don't have amenities, landlords can offer to cover part of memberships to gyms and cable TV subscriptions.
Implications of Rental Concessions for Landlords
If you decide to go through with rent concessions, note that it would affect your gross revenue. This has implications when you decide to buy a new property or apply for refinancing. As part of real estate underwriting, the lender will evaluate your rental income, including the concessions you've made.
Lenders are interested in knowing how much revenue the asset can generate. There is a very real chance that it would affect your chances of getting a good interest rate. It could also make it harder to find sellers to buy your property.
It is ultimately up to the landlord to weigh the pros and cons of rent concessions.
In any case, make sure to document rent concessions, even if they are part of the lease term. This may sound counterintuitive at first, but it would serve as a constant reminder for tenants that they've secured a great deal.