Avoid the Trend: Why Private Landlords Shouldn't Offer Concessions

Are you concerned about the slowdown in your local rental market and worried your property might sit vacant for too long? The issue could be that your rent is set too high, and offering concessions as a private landlord may not accelerate the leasing process.

While rent growth has only slightly eased compared to last year, more property managers are offering short-term incentives. A Zillow report from July shows that one-third of property managers are now offering concessions as the rental market cools.

Before joining BiggerPockets, I worked with two different property management firms: one was a small, investor-focused operation, and the other managed a large apartment community with over 200 units. In the small investor setting, concessions were never offered, but in the large apartment community, almost every tenant received some type of move-in special or discount.

The decision to offer rent concessions often depends on the asset type, and I don’t believe private landlords should consider them. Here’s why.

Understanding Rent Concessions

According to Zillow, rent concessions are increasing across 45 of the 50 largest metro areas. Although rents were up 3.4% year-over-year in July, a fairly average rise, rents have skyrocketed by 33.4% since the beginning of the pandemic.

Despite this rent surge, the non-seasonally adjusted vacancy rate in June was 6.6%, exactly the same as the pre-pandemic average for this time of year. This suggests that landlords offering concessions aren’t struggling with vacancies but are instead trying to maximize net operating income (NOI) by keeping rates high while offering temporary financial relief to prospective tenants.

The rising use of concessions to address the sharp rent hikes is no surprise, as it’s a way to attract tenants priced out of the market. With over a third of Zillow’s rental listings offering concessions, it’s a common practice. But is it the right strategy for private landlords?

Large Multifamily Properties vs. Private Rentals

A key factor to consider is that many large multifamily complexes, whose property managers use Zillow to list rentals, are driving the statistics on concessions. These larger properties often offer move-in specials to reduce upfront costs for tenants, making it easier for them to commit. Typically, they only require a $300-$400 deposit, which, in my opinion, significantly increases the investor’s risk.

As a private landlord, you might be asking for first and last month’s rent plus a security deposit equivalent to one month’s rent. With the average U.S. rent at $2,070 in July, would a tenant prefer to pay $300 upfront or over $6,000? The answer is clear.

Managers of large properties aren’t as pressured to fill vacancies as private landlords, thanks to the steady income from other units. While these managers aim to keep vacancy rates low, high tenant turnover makes concessions a useful tool to shorten days on market (DOM).

Why Private Landlords Should Avoid Concessions

For private landlords, offering rent concessions is not as impactful when targeting long-term tenants for single-family homes (SFHs) or small multifamily properties. These types of properties have seen stable demand, and historically, concessions haven’t been part of the equation. Simply lowering your rent will often attract tenants faster than offering a discount or perk.

For example, offering $600 off upfront or reducing the rent by $50 a month results in the same financial impact over a year. But maintaining a consistent rent increases the likelihood of securing a reliable, long-term tenant. Tenants who are hunting for deals might be better suited for apartment complexes, as they may not be planning to stay for the duration of your lease.

Furthermore, once a tenant has received a concession at move-in, they may expect similar deals at lease renewal. This can create tension, potentially leading to lost income or tenant turnover.

Concessions can also send the wrong message, signaling to potential tenants that your property isn’t in high demand or has issues, thereby lowering its perceived value. As a private landlord, your goal is to maintain a high standard of living and attract tenants who view your property in the same way.

Final Thoughts

While rent concessions have grown in popularity, I don’t believe they are a game-changer for private landlords of SFHs or small multifamily properties. Lowering your rental rate is more effective for attracting quality tenants.

In previous post: "What Does Off-Market Commercial Real Estate Mean?"