When it comes to marketing, many things can draw attention to your property. Of course, online ads are essential for your rental property, but even the best rentals sometimes need a little something extra to get tenants to commit to a lease. That said, moving is expensive, and therefore offering free money is always a crowd-pleaser. However, there is a debate within the industry over which is better – offering one month’s free rent or reducing the rent monthly throughout the lease term? Deciding to offer rental concessions is a big decision with both pros and cons. Join us below to review when to offer rental concessions and which one might be best for you.
What Are Rental Concessions?
The term rental concession refers to adjustments or compromises an owner allows in the lease to attract or keep tenants. They can be either temporary or last the length of the lease term and could involve monetary compensation, a discount, or physical goods or services.
When Should I Offer a Rental Concession?
Most often, rent concessions are a tool used to attract a larger group of potential tenants and, in turn, fill vacancies quicker. However, that is not the only time rental concessions can help. Let’s look at the circumstances below to see when it may make sense to offer a rental concession with your lease.
New Property Lease-up
Generally, a lease-up refers to initially filling newly constructed properties. Therefore, rental concessions act as an incentive for new tenants to choose your building. After all, filling vacancy quickly is vital to reaching occupancy goals and optimum profit potential.
Boost Marketing Potential
If you are just looking for a faster way to get your unit noticed, rent concessions are an ideal marketing tool. The key here is to competitively price the unit and offer concessions strategically. Keep in mind, not every rental concession involves free rent. In fact, owners may choose to offer free access to amenities, discounted parking, or assistance with moving costs.
Keeping Current Tenants
Not every rental concession is geared toward finding new tenants—instead, some focus on keeping the great tenants you already have. Sometimes, landlords use rent concessions as incentives for current tenants to renew and continue renting the unit, which can help reduce costly turnover expenses. In fact, tenant retention is the best way to keep a rental property profitable. So, if you have a great tenant on the fence about staying or going, consider a rental concession to help beat out the competition.
One-Month Free vs. Reduced Rent – Which is Worth it?
To better understand the two most common rental concessions, let’s review some of the pros and cons below. We will use $1,300 a month on a twelve-month lease as an example to make things easy. This will help to illustrate how each concession looks for your bottom line.
The Benefits of Offering One-Month’s Free Rent Free
- Easy Marketing – It’s easy to attract people when they do not have to pay for the first month’s rent. That said, this tactic works particularly well if you need to fill vacancies quickly or have multiple vacant units. Moving is a costly endeavor, and renters appreciate any savings they can get. So, a first-month free option can make for a better transition while tenants wait on their previous deposit refund.
- Increased Renewal Rates – When the lease is up, renewal increases are based on the monthly rental amount. Therefore, a one-month concession does not factor into the equation. In other words, you can still charge an increased renewal price that is appropriate based on local comps and the current monthly rate. So, based on our example, owners can calculate an annual increase on the $1,300 monthly rent – even though the renter did not pay one of those months.
- More Potential Income – One-month-free concessions are vastly appealing to tenants and therefore tend to keep occupancy high. In turn, properties with low vacancy rates typically have more leeway in terms of cash flow.
Disadvantages of Offering One-Month’s Free Rent
- A Month of Missing Income – Lost income is the most obvious con of offering a free month of rent. However, this type of rental concession immediately reduces income for a full thirty-day cycle. So, if you are in a pinch as an owner, those 30 days might be the make-or-break moment for your bank account.
- Attracting Cash-Strapped Renters – Attracting renters who are solely interested in your property because of a rent concession could be a red flag for future problems. While this is not always the case, it is a possibility to be aware of. When the rent is at the top of a tenant’s budget, they generally cannot cope as well if a life event disrupts their income. So, if tenants suddenly experience unexpected bills or job loss, owners may find themselves navigating the eviction process. That said, a process to thoroughly screen renters is vital to ensuring they have sufficient income to cover all costs.
Pros of Lowering Monthly Rent
Now let’s use the same $1,300-per month example to see the pros and cons of lowered rent as a concession. Some property owners believe it makes more sense to lower the rent versus offering a single month free. At Bay Property Management Group, we agree.
Lowering the monthly rent expands your pool of potential tenants because typical renters will search within a specified price range. So, reducing a $1300 per month rent to $1200 effectively moves your property into a different pricing category. Let’s review some of the pros and cons of reducing the rent below.
- Attracting a Larger Pool of Potential Tenants – The higher your monthly rent is, the smaller the pool of potential renters. So, by lowering your monthly rate, you are making it more searchable to a greater number of people. This increase in visibility is an important marketing tool for landlords.
- Filling Vacancies Quickly – The longer your property stands vacant, the more money you lose. Moreover, the higher the price, the longer it is likely to exist without potential tenants. Of course, there are always people looking for rental properties, and today’s market is competitive. That said, cast a wider net with more affordable pricing is sure to help fill vacancies quicker.
Cons of Lowering Monthly Rent
- Decreased Revenue Each Month – It’s no surprise that a lower monthly rent equals less income for owners. So, it’s important to make sure you evaluate realistic numbers that can ensure you can cover your own bills and expenses. That way, you don’t find yourself in crisis mode a few months down the road.
- Difficulty Increasing Rent with Renewals – When a tenants’ lease is up, the owner may have difficulty bringing the property back up to market rates. For someone that income-qualified at a lower rate, any sharp increase may lead to turnover. Also, turnover itself is costly for owners and typically requires repairs, cleaning, marketing, screening new renters, and dealing with new lease agreements.
Other Types of Rent Concessions
While reducing rent or offering a free month may be the most common choices, rental concessions could be any number of things. The idea is to incentivize tenants and set yourself apart in a competitive market. So, check out these other examples of possible rent concessions below –
- Free Amenities – If the property itself or local neighborhood has a gym, convenient parking, or onsite laundry that would typically cost money, offering a discount or free services is a great way to attract tenants.
- Merchandise and Service – Many prospective tenants would jump at the chance for free services such as a year of Netflix or another streaming subscription service. Another option is to offer free merchandise such as a Smart TV.
- Moving Costs Assistance – As we mentioned above, moving is expensive for renters. Therefore, any help a new landlord could offer is sure to be appreciated. For example, how about offering a free storage locker? What about a gift certificate for U-Haul? These are both great incentives for new tenants.
- Desirable Property Upgrades – Sometimes, a fresh paint job, new appliance, or upgraded light fixtures are all that is needed to get tenants to commit to leasing your property.
- Free Prorated Rent – Instead of offering an entire month free, consider covering the prorated portion of rent. When a tenant moves in on any day that is not the first of the month, that rental period is prorated. This amount is less than a full month’s rent, so it means less of a loss for the owner while still providing savings for the tenant.
One Concession We Do Not Recommend
- Reduced Security Deposit – Moving into a new property requires tenants to come up with rent and a security deposit. This is a big expense along with the costs of moving in general. Therefore, some landlords opt to reduce the deposit as a means to attract tenants. However, the deposit is in place to protect owners against tenant damage at the end of the lease. Therefore, we do not recommend this option as the best choice for owners.
The Bottom Line on Rent Concessions
At the end of the day, offering incentives is a personal preference for landlords. So, whether you choose to offer reduced rent, a free month, or other goods and services – rent concessions are a worthwhile marketing tool. However, there are important pros and cons to consider with every choice.
Are you feeling stuck trying to decide if offering rental concessions is the right choice for you? Thankfully, you do not have to deal with this decision alone. Bay Property Management Group understands the intricacies of the local market and creates a marketing strategy to reduce vacancy time and get your property noticed. This is just one of the reasons BMG is Baltimore’s go-to rental management company. So, ready to take your property to the next level and maximize profit potential? Reach out to Bay Property Management Group today.