If you are a fledgling landlord, perhaps your motivation for entering the property rental business is the prospect of significant returns. However, owning a successful investment property requires attracting tenants and maintaining a high occupancy or retention rate.
Landlords and property managers must employ an effective marketing strategy and set a competitive rental rate to entice tenants. Rent concessions can also be a practical approach to achieve this goal. This blog post serves as a guide for landlords to learn more about rent concessions.
Rent Concessions: Defined
Landlords or property managers make rent concessions to attract tenants or maintain a stable retention rate. Basically, this action is a compromise or adjustment to the terms of the rental contract, providing a temporary incentive that is advantageous to tenants and enticing them to sign or renew a lease.
Filling vacancies in the rental units is also a motivating factor for landlords or property managers to make rent concessions. For instance, it is easy to attract renters if a landlord waives the first month’s rent, making it a common type of rent concession.
Landlords will make a compromise to fill in vacancies because the longer a rental unit has no occupant, the less profit they make. They will waive the first month’s rent because it is a far less expensive compromise than shouldering the expenses (such as marketing) of a vacant rental unit.
Types of Rent Concessions
A rent concession can be a discount, rebate, monetary compensation, or tangible good or service. Landlords or property managers can make rent concessions on a one-time, monthly, or annual basis. Rent concessions can be advertised or negotiated privately between the landlord and tenant.
It is at the discretion of the landlord to give rent concessions. However, a tenant can ask for an adjustment or compromise to the terms of the lease, which usually leads to a negotiation based on the latter’s needs and the former’s preference. Landlords are getting more creative when making rent concessions to ensure they attract or retain tenants.
This list contains examples of rent concessions that are commonly used by landlords:
- Free or prorated first month’s rent
- Discounted rent for a one-year lease
- Waived fees (move-in fees, pet fees, etc.)
- Waived or reduced security deposit
- Free Wi-Fi connection or other utilities
- Free use of laundry, parking, storage unit, or other on-site amenities
- A landlord will cover moving expenses
- Pay for broker’s fees
- New appliances, updated decorations, and renovations
- Allowing a tenant to paint the walls of its rental unit
Landlords should know about three types of rent concessions, especially if it is their first time purchasing or leasing a property.
- Marketing concession. Landlords of older rental properties or renovated buildings use this strategy by marketing the unit slightly above the average rental rates in the market. When they concede to lower the rate, it may look like it is conforming with the rest of the market.
- Lease-up concession. This strategy is usually intended for newly built properties, particularly commercial buildings. It aims to lease the rental property quickly to meet an occupancy objective and become profitable.
- Red flag concession. This is a type of concession just to keep the rental unit occupied, but the property has issues that are overshadowed by the concessions. Make sure to be alert to such concessions before buying or refinancing an investment property.
When to Make Rent Concessions?
A landlord who is starting a rental property business with many rental units can make rent concessions to attract potential tenants and fill vacancies quickly. A slow market is also the best time to employ this strategy if you are having a hard time finding tenants.
Aside from making your rental property appealing to potential tenants, you can also use rent concessions to retain good tenants. Of course, you want to retain a tenant who pays his rent timely and consistently. Improving tenant retention can help increase the profits of your rental business.
Downsides of Rent Concessions
The disadvantage of making rent concessions is that some tenants will get used to these concessions and want to keep them forever. For instance, if you provide free parking for a one-year lease, a tenant might want to keep it to the new lease. Not conceding to the tenant this time might cause the latter to move out of the rental property.
Some rent concessions also come with risks. For instance, waiving a security deposit can be disadvantageous if the tenant causes damage to the rental unit and abandons the property.
Yes, rent concessions can be a good strategy to attract prospective tenants and improve tenant retention. The higher your occupancy and retention rates, the better your rental income. However, there are some risks to rent concessions. So, it is crucial to think carefully before making adjustments or compromises to the terms of the lease.