Concessions Are Rising, But Private Landlords Should Never Offer Them
Are you worried about your local rental market cooling off, fearing that you will have a property sit on the market for too long? Well, chances are you are priced too high, and offering rent concessions as a private landlord will not be able to help you speed up the application and leasing process.
Though rent growth is only slightly softer than last year, far more property managers are offering short-term perks. According to a July rental market report by Zillow, one-third of property managers are offering concessions as the rental market cools.
Before BiggerPockets, I worked for two different property managers: one mom-and-pop that served investors like you and me, and one that was an onsite apartment community (200+ units). Working for the mom-and-pop, I have never seen an investor use concessions. On the other hand, when working for the apartment community, almost every single tenant had some sort of move-in special or concession.
The use of rent concessions will be really dependent on the asset class, and I do not believe that private landlords should be exploring them as options. Here’s why.
About Rent Concessions
According to Zillow’s report, rent concessions are up from year-ago levels in 45 of the 50 largest metro areas. U.S. rents were up 3.4% year over year in July, which is a relatively average increase, but zooming out a few more years since the beginning of the pandemic, U.S. rents have increased by 33.4%.
The interesting thing about this 33.4% rental increase is that the non-seasonally adjusted rental vacancy rate was 6.6% in June, according to Zillow’s numbers. The pre-pandemic average vacancy rate for this time of year was also at 6.6%. This tells me that landlords offering concessions are not hurting based on increased vacancy numbers; instead, they are looking to maximize NOI by continuing to increase rates while offsetting the tenant concern of not having enough funds for move-in.
The increased use of rent concessions to combat such massive rental increases in the last three to four years comes as no surprise as a way to fill vacant units that have potentially priced out a large portion of the tenant pool. With over one-third of rentals on Zillow offering a rent concession, this is a very common tactic, but is it right for you as a private landlord?
What About Large Multifamily Assets?
A big factor to consider here is that many property managers at large multifamily complexes are using Zillow for their rental listings, impacting the percentage of properties Zillow is reporting to offer concessions. Big complexes use move-in specials to decrease tenants’ out-of-pocket expenses at move-in, which makes it a more affordable option right out the gate. They typically only charge a $300-$400 deposit, which, in my opinion, dramatically increases investors’ risk.
As a private landlord, I typically see first month’s rent, last month’s rent, and a security deposit equal to one month’s rent due at move-in. With the typical U.S. asking rent of $2,070 as of July, according to Zillow numbers, would it be more enticing to pay $300-$400 upfront or $6,000+? The answer is simple on this one.
The manager of these assets will not be as pressured as a private landlord to fill a vacancy urgently due to the nature of many other units bringing in revenue. Their goal is, of course, to keep the vacancy rate as low as possible, but that does not mean that there is not a lot of turnover, making rent concessions an attractive tool to shorten days on market (DOM).
The two most common reasons I see properties offer concessions, whether it was the one I managed or competitors in our market, were units that had been on market for 30+ days, or units that were outdated and ready for turnover. Many times, tenants were looking for just one more reason to commit to leasing a unit, and offering a discount on your first month’s rent mitigates a lot of stress around moving costs. I do think this is a no-brainer marketing strategy that a large multifamily property manager should implement, as it fills your vacancy rate and increases the property’s NOI, making the overall value of the property increase.
What About Private Owners?
My stance is that private landlords should not offer concessions, as I do not think they will be all that impactful when it comes to a private landlord like you or me searching for a long-term tenant for our single-family homes (SFHs) or small multifamily properties. The rental market has been pretty stable for SFHs, and small multifamilies that offer concessions have never even been in the picture until recently. Decreasing your rental rate always fills the longest DOM properties, and I still believe that is true today for a traditional long-term lease.
Offering $600 off the move-in cost or reducing the rent by $50 a month results in the same financial impact over a year. However, maintaining a consistent rental rate increases the likelihood of attracting a reliable tenant who can afford the rent long-term. Let the tenants who are in need of blazing deals rent at the apartment complexes rather than at a private landlord’s property, as they may not be looking to stay for a long time or worse, the duration of your lease agreement.
When it comes to thinking about renewing your lease, you may have tenants who received concessions at move-in now expecting similar offers. This can put you in a difficult position, potentially leading to either lost income for the next month to keep your tenant or provide enough frustration that it can lead to turnover.
Regardless of the approach, it’s crucial to clearly communicate that the concession is a one-time offer to help prevent any confusion or future attempts by tenants to negotiate similar deals.
Offering concessions with move-in specials might signal to potential tenants that the property is not in high demand or has issues, potentially lowering its perceived value. This is the biggest fear I have as a single-family landlord, and I would much rather drop my rental rate to stay competitive as long as I am finding a qualified tenant. I want my properties to stand out, but not because of the perceived fear that they have known issues, and I am offering a move-in special to compensate.
As a private landlord, you want to offer the highest level of housing quality possible and should feel confident your tenant has the same perception for their quality of living there. Therefore, moving a tenant into a property with known issues at a discounted rate will not end well for anyone.
Final Thoughts
Though the data tells us that rent concessions have become more popular in recent years, I still do not believe they will impact private landlords for single-family or small multifamily properties that dramatically. Lowering your rate will start to improve the number of views, tours, and applications to your properties from the quality tenants that you are trying to attract. Leave the move-in specials and discounted rent for the landlords willing to take on additional risk on the operational side of things, and move your goal toward financial freedom at a safer, more calculated pace.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.