You're looking for an apartment and you come across one that offers one month free rent. Have you ever wondered why landlords offer rent concessions instead of just lowering the price? Keep reading to find out what’s behind this weird pricing strategy.
What is a rent concession?
A rent concession is any discount given by the landlord to reduce the total amount that the tenant pays. The most common form of a rent concession is giving one free month during the lease. For example, on a 12-month lease, the landlord may offer the 12th month free.
Rent concessions also come in the form of waived fees like pet fee or amenity fee. Essentially, any way that a landlord chooses to discount the amount paid by the tenant, except by reducing the rent directly, is a rent concession.
What is gross rent?
Gross rent is the listed rent of the apartment before any concessions are applied. This is also the rent amount that will be listed in the lease.
What is net-effective rent?
Net-effective rent is the amount that the tenant will actually pay over the duration of the lease once discounts are applied.
For example, let’s consider an apartment listed for $2,500 per month. The apartment is offering one month free on a 12-month lease. Here the gross rent would be the $2,500 listed price. The net-effective rent would be lower since the tenant is getting one month free.
To calculate the net effective rent for this apartment, multiply the gross rent by 11 and then divide by 12. This gives us a net effective rent of $2,291.
You can use our calculator here to easily calculate the net-effective rent of an apartment.
Now that you are familiar with the terms let’s move on to why a landlord will offer rent concessions instead of just lowering the gross rent.
Landlords buy their buildings using borrowed money, or debt. The financial institutions that lend the landlords their money look at the building’s financials before making a lending decision.
One of the biggest factors that goes into the decision is the gross rental income the building produces. This is the sum of the gross rent of all the units in the building. It is a key factor that shows what the building in total can produce in rental income.
As a result, landlords want to keep their gross rent as high as possible. But if the market doesn’t support the gross rent they have listed, that is when you will see rent concessions.
In some of the larger cities in the US including New York City, Los Angeles, San Francisco, Oakland and Washington D.C., there are policies in place that limit the amount a landlord can increase rent. In exchange for this limitation, these cities provide tax breaks back to the landlord. This is called rent control or rent stabilization and the goal is to make housing more affordable.
In a building with rent controlled units, there are strict limits on how much a landlord can increase rents. Often they are a percentage of the gross rent per year. As an example, there may be a policy that states that rent controlled apartments can only increase by 2% per year.
Due to this limitation, landlords with rent controlled units want to preserve high gross rents at all costs. If they lower the gross rent, then it makes it more difficult to “catch up” to market rents in the future. If there is a situation where the apartment will only rent for a price that is below the gross rent, the landlord will use price concessions rather than lower the gross rent.
A smaller motivator is the use of rent concessions as an advertising tool. Consumers love discounts and renters are no different. Psychologically, people are more inclined to be satisfied with a purchase if they received a discount.
Landlords use this to their advantage by raising the gross rent but offering a concession. The renter feels like they got a great deal, but the net amount of money the landlord receives is the same.
Another reason a landlord may offer a concession is that when it comes time to renew the lease, any rent price increase will be based off the gross rent and not the effective rent. So if the landlord raises rent 2% at the end of your lease, that increase applies to the gross rent.
Often it is harder for a landlord to get a tenant in the door than it is to get them to renew a lease. Moving is a huge pain for most renters. Landlords know this and know that renters typically will pay slightly more than they otherwise would just to avoid moving.
How to use this to your advantage
Now that you know more about how rent concessions work, you can start to use this to your advantage. You may not be able to lower the gross rent, but a savvy tenant can often convince the landlord to include a rent concession and therefore pay less in rent.
For more tips on how to negotiate a lower rent, check out our post on that topic here.