As a property owner, you might have come across the term “rent concession.” If you have a vacancy in one of your investment properties, this is something you might want to consider.
It’s unavoidable to have periods of high vacancy rate but offering a rent concession can help boost up your investments.
Rent concessions are a great way to attract new renters and keep the vacancies filled when the rental market is slow.
But quick check investors: did you know there’s a right way to offer a rent concession?
In this guide, you’ll learn what investors need to know before offering rental concessions!
What Are Rent Concessions?
The proper definition of a rent concession is a compromise a landlord makes in the lease terms to attract a tenant.
In short, rental concessions are temporary incentives to persuade tenants to sign or renew a lease agreement.
You see all forms of this happening in reality.
When a retail store, for example, needs to boost some of its sales…one way is by offering a temporary incentive like a huge discount, buy 1 take 1 deal, or other value-driven strategies to attract customers.
What are some of these temporary incentives in real estate? Typically, a reduced rent fee or a type of service provided for the tenant.
Some may ask for free rent, but this hardly happens unless it’s a desperate situation.
Offering these in a lease contract helps the landlord avoid vacancies, maintenance, and marketing costs for their rental property.
The more vacancies and spaces you have in your property, the less income you make. You can resort to offering these instead of having a rent increase in a sluggish market.
Rent concessions keep a rental unit marketable to potential tenants so your rental income keeps flowing.
How Does a Rent Concession Work?
An empty property comes with vacancy holding costs like utilities, mortgage payments, and taxes.
These can eat up the landlords’ profits. To avoid this, a landlord may choose to offer a rent consession in a newly drafted rental agreement.
Rent concessions can be offered in the following ways:
- The tenant can be allowed to skip paying rent during the first and last month of the lease term.
- The landlord can offer reduced rent for every additional month a tenant stays in the property.
- A reduction in the fee required for the security deposit.
- A landlord may choose to pay a part of a tenant’s moving costs.
- A landlord may pay a broker fee.
- Landlords may give tenants a rental property upgrade in the form of new appliances, renovated spaces, or new furniture.
There are a lot more options for rental concessions.
It’s up to the landlords if they choose to offer a reduced rent amount for the tenant to save up or to enhance the property itself.
Types of Rent Concessions
There are three major types of rent concessions to know as a landlord and as a tenant. These are divided based on their financing potential.
Lease-up concessions are common for new commercial buildings. Discounts are offered to new renters as this concession aims to lease a property quickly.
This type of rental concession will attract a renter with its seemingly more affordable price. This is done so that investment properties will immediately become profitable.
Red Flag Concessions
Red flag concessions are ones that continue to be offered even after the lease period has expired. This is one way to keep a rental property occupied.
It’s called a red flag as it can signal a concern with the property before purchasing.
For example, a property might have a high tenant turnover rate, and the only solution for a real estate owner to alleviate this is the continued offers of concessions.
If investors keep the property occupied, solely with ongoing concessions, it might be a sign of a larger problem with the rental property.
Marketing concessions are usually used for older investment properties (e.g. renovated buildings) as a marketing strategy.
This is done by marketing the property slightly above the average market rate of the city it’s located in.
Then, a “concession” is offered by the renter in the form of a discounted rent price which is in-line with the market rent rates.
This will make a potential tenant believe that the lease terms and rent concessions favor them greatly.
As a landlord or real estate owner, it’s an advantage. As a tenant, you’ll need to be more aware of the usual market prices.
These types of concessions are allowed. As long as the place is well occupied and rents are supported by the market, it’s not much of a concern.
Common Examples of Rent Concessions
As mentioned above, a concession can be a rebate, discount, or monetary compensation. The owner can advertise concessions or negotiate the terms of a lease to attract or retain tenants.
These concessions can be used on a one-time, monthly, or yearly basis.
Rent concessions are offered by the landlord but a tenant can demand or ask for a concession. Negotiations for lease terms can be done between the two parties.
Landlords can get creative with the type of concessions they offer to see what would work best with potential tenants. Any deal that would get a space filled.
Besides monetary concessions, landlords can resort to offering items or services to attract potential tenants and retain current ones.
Merchandise or Service
Items such as free appliances and furniture can be offered as concessions for tenants.
Besides items, services can also be offered. One example of this is offering internet or wi-fi services.
Access to Amenities
Some have property amenities they can offer to tenants for free as concessions. For example, owners can offer a storage locker or storage unit for a tenant to use.
When to Use Rent Concessions
Rent concessions are usually used when there are prolonged vacancies and difficulties in finding a tenant. These aren’t common in a strong rental market.
A concession is also commonly offered during a lease renewal.
A landlord may convince a tenant to sign a new lease instead of moving out. Resident retention is one of the best ways to keep your property/real estate investment profitable.
If you have a long-term tenant who always pays on time, you might want to offer them a small concession too!
You must have a good feel of the market to know when is the right time to offer a concession and which type would be effective.
Disadvantages of a Rental Concession
Rental concessions do help fill vacancies quickly which results in having fewer options for tenants. This leads to an increase in rental prices which is an advantage for landlords.
Once you’ve handed in a certain amount of gold, don’t expect anyone to give it back easily.
A major disadvantage is some concessions can be challenging to take away.
Here are some real estate examples:
- When you offer free parking space to a renter as a concession for their first year, they might be upset to pay for something that was free in the initial agreement.
- If a tenant was offered a rent discount, you might need to notify them of the price increase when renewing their contract. They might end up looking for a better residence.
- If you offered them a reduced security deposit, you might end up paying for tenant damages or compensate when they don’t pay on time.
Using rent concessions can be risky but it can be avoidable with proper screening of your tenants.
You could also state in the lease that the tenant has to pay back the full amount of concession when they leave before the lease term ends or if they violate other clauses mentioned in the contract.
If you’re a tenant, be on the lookout for this too!
Wrapping It All Up!
Rent concessions are a great solution to call the attention of potential tenants and retain current tenants. Each situation will need a different approach when offering one.
Rental concessions should be offered to a tenant that has been presenting good behavior (e.g. paying rent on time). This can be an incentive to improve landlord-tenant relationships.
Make sure to always include clear rules and expectations in your lease! Understand your tenants and be creative with your concessions. Besides having a profitable investment, it can be sustainable too!
Hope this article helped you understand everything there is to know with rental concessions.