Investing in rental property is usually considered to be the most preferable investment strategy for multifamily investors. Not only does it provide them with an additional source of regular income but it also results in a steady appreciation of their portfolio’s value.
However, before venturing into the housing market, multifamily investors must be made aware of a real estate development which has the capacity to directly affect their risk and reward profiles. This is what the current property markets commonly term as rent concessions.
What Are Rent Concessions?
A rent concession is essentially a rebate, a price reduction or some other form of benefit offered by landlords for inducing a prospective tenant to move into their property. The concession does not always have to be monetary in nature. It could also involve the provision of a physical good or service. Providing a concession in rent helps the landlord avoid vacancy, maintenance and marketing costs.
How Are Rent Concessions Offered?
Rent concessions are usually offered in the following ways:
For either the first or the last month of the lease contract, the tenant does not have to pay any rent
A nominal rental discount is offered for every month that the tenant continues to stay on the rental property
A reduction in the amount of security deposit collected by the landlord
Helping the potential tenant with moving costs
An upgrade to the rental unit in the form of a new appliance, better light fixtures or a newly tiled floor
Free access to the amenities like gymnasium, swimming pool, parking space etc. which are available within the premises
As a multifamily investor, you must know that these rent concessions are not offered in a booming rental market. They are generally provided in case of a slump or when the property is being leased out for the very first time. Rent concessions are also offered to quickly fill in a vacancy and prevent an existing tenant from moving out.
What Are the Different Types of Rent Concessions?
Whether you are a seller, a buyer or a multifamily investor, understanding the different types of rent concessions will enable you to make an informed investment decision.
As per their financing potential, rent concessions have primarily been divided into three categories:
Lease-Up Concessions: These are basically the discounts which are offered for apartments in their lease-up phase. Such concessions are provided to ensure that the newly constructed apartments are quickly able to reach their designated occupancy levels
Marketing Concessions: These concessions are normally offered on rental properties which are priced above the prevalent market rate. The concession is just a mechanism to market the property in such a way that the buyers feel like they have saved costs
Red-Flag Concessions: These are the kind of concessions which continue to be offered, even after the original lease period has expired. This is done to make sure that the property remains occupied at all times
Implications on Multifamily Investors
If the multifamily investors are looking to buy or re-finance a rental property, they should be aware that lenders are fundamentally interested in knowing the income-producing capacity of every asset. When rent concessions come into the equation, they tend to be subtracted while determining the total rental income.
To make sure that the rentier gets the best rent concession, a lender must ensure transparency in the process with proper documentation of every term.
Rent concession can be a boon or a bane for the lenders, depending on how they manage it. It can help the landowner get renters in times of scarcity in the market or be conducive to subduing the competition in the market. On the other hand, rent concessions are often not simple to eliminate since a rentier would otherwise leave. Additionally, when the lender applies for a loan, an apartment concession analysis is conducted by the bank. The concession can degrade the value of the loan by reducing the asset values.
Although the lenders do not consider an upfront lease concession and a marketing concession to be of great concern, they are alarmed by the presence of red flag concessions. These are considered to be indicative of unresolved structural issues and might act as an inhibiting factor when a loan is being underwritten.
Parting Thoughts
Rent concessions are a great way to attract and retain tenants for a long period of time. However, it is pivotal for investors to understand the pros and cons associated with a recurring concession before they decide to use the housing market as a credible investment vehicle.
