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.
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 rent concession helps the landlord avoid vacancy, maintenance and marketing costs.
Rent concessions are usually offered in the following ways:
As a multifamily investor, you must know that these 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.
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:
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.
Although the lenders do not consider lease-up concessions and marketing concessions 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.
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 such concessions before they decide to use the housing market as a credible investment vehicle.