My husband threw this idea at me: What if we charge the tenants a little more for rent each month and gave them the 12th month for free? Here's how it would work:
If rent is normally $900 per month, we charge them $982 per month for 11 months. This is the same as if $900 were paid for 12 months. We tell the tenant that if they pay their rent on time every single month for 11 months, then they can have the last month for free. If they make all their payments on time, then we make the exact same amount we would have anyway. If they don't make all payments on time, then we just made an extra month's worth of rent, because they would have to pay the 12th month. The tenant doesn't have to know that we are charging more than we normally would have.
Of course it would only work if people are willing to pay $82 more per month. Seems to me like they would be thrilled to get a free month's worth of rent.
I've been mulling it over. What do you think? Pros and cons?
Account Closed I like the idea personally. You would just have to make sure that 982.00 isn't pushing the market. If you can rent it at 982 I don't see why not! Not to mention 982.00 is probably more then you would make in late fees! The only down side could be someone getting really upset if they are "just a day" late and it costs them 982.00 I think you would want to have a bit of grace maybe if they are more than 5 days late over the course of the year? Which if they are a day late a few times will tick that down. Or if they are a week late it is gone? I just think you'll want to make sure they understand it so they don't get upset.
I like you guys thinking outside of the box
I think this is a great strategy! All around this could work very well! This would only work with new tenants and not existing looking to sign a new lease though.. I may utilize this strategy on our rentals as well. Great idea!
@Ryan Dossey Good points from both of you. I would probably give them a short grace period of 3 days maybe, to keep it in effect. Definitely would only work for new tenants. The lease would say $982 for 12 months. Then I would add an addendum explaining the free month and how they would qualify for it. Thanks.
I like this idea. Along with "Post marked by the 4th" for local rentals, this would be a great way to solidify timeliness.
I know a lot of apartment complexes who do this! This is a great idea in theory. After being taught by the hard knocks of life I would do this for a couple of reasons
* rentals have a ceiling- I have noticed that even pricing above $50 I don't get calls. People simply don't look above their price range!
* move out early- if people move out early you lose the discount. I already change a break lease cost. Trying to get this money on top of it would be difficult.
Personally while it's a great idea. In my area it wouldn't work.
I wonder how much harder it will be to rent a place for nearly $100/month more than the market rate, though. Good tenants know they can qualify anywhere, and are typically looking for a good deal. If they see your rent of $982 in the headline of an ad, they may just skip it and never bother to dig deeper.
Another issue you'll have to address is enforcement. If you get to month 12 and the tenant claims they paid on time the past 11 months, but you know their rent arrived a day or so late in month 4, how do you prove it? Are you going to create a special receipt system for the tenant so they have proof they paid on time? What if they photoshop themselves a good fake one for the month(s) they pay late, and you can't prove otherwise in court when you try to claim they owe you rent for month 12. Might be tough to enforce, especially here in CA with our tenant-friendly courts.
Not saying it's a bad idea, these are just some issues I thought of. Might want to talk to a lawyer about how to enforce it.
As long as the market will bear the $982 rent rate. Why not try it! For some of our rentals we will offer a free prorate of 2 weeks or something along those lines if we are antsy to get a unit leased. Or if they want to start the lease on a 1st but take possession on the 25 of the month before. 5 days rent free usually makes a new tenant pretty happy. Not a big loss on the cashflow and the unit gets leased faster.
I hesitate to rain on the parade, but there is evidence that free rent is counter productive. I saw a residential REIT executive give a presentation to a landlord's group and she said that they had done studies which showed that tenants that received a month's free rent or other such incentives were more likely to be short term tenants as they go from building to building looking for the next sweet deal. Apparently some people think nothing about loading all their stuff into a moving truck in order to score a month's free rent, a free TV, or whatever else is on offer. I tried this once with an older tenant feeling that a senior would be a great long term bet. I lost $1,100 on the deal and he was gone in two years, as soon as his lease was up. The next landlord offered a move in incentive. QED.
@Elizabeth Colegrove If people move out early, I would get the extra rent for the months they were there. I would actually make more money per month that way, because I wouldn't have to give them the free month. The addendum would definitely have to say that they are required to pay for 11 months before they qualify. Early lease terminations would not qualify.
Getting the extra rent may not always work. But maybe for some rentals it would.
@Kimberly T. In in my case, I don't think enforcement would be a problem. All of my tenants pay electronically online. So it's easy to show when they paid. If your tenants mail in rent, you can keep the envelope with the postmark. Just require that it is postmarked by a certain date.
so when is the month free in the beginning or end? The apartment complex I worked for did it in the beginning. I think this is a great idea in some cases but in my area it wouldn't work. My houses rent for $1600 so that would be an extra $133.33 to break even. I know that even at $50 above the perceived market I can't get anyone in! Just good for thiught
@Elizabeth Colegrove It would definitely be at the end. It would be after they paid rent on time for 11 months. An extra $133 is a lot. It might work better with places under $1000 per month.
@Stephen E. Thanks for the input. I'm guessing that you lost $1100 because you gave the free month at the beginning? I don't think I can lose money at all doing it at the end.
It will work, but finding the tipping point is the problem. The farther you go over $1k a month for rent the harder it will become. The lower, the easier most likely.
@Account Closed I gave it at the beginning but that is not why I see it as lost. I thought I was getting a long term senior as a tenant who was on his last move. Instead he was footloose and fancy free and thought nothing of moving again. If I had known that there is no way that I would have offered free rent. Having tried this once I have sworn off it. My incentive is offering a clean and well maintained place that is better than most rental property in the area and at a fair rent.
Okay, Ill play some devils advocate on this one. I personally think its a decent idea and it will work. However, it seems that any tenant with a brain would figure this out.
I personally would not implement this strategy because:
1. It create more potential future objections - "But c'mon I was only three days late in March, can you give me a break on the 12th month Michelle? Just this one time?"
2. It attracts lower end tenants. Poor people are looking for freebees and may increase your frequency of tenants not paying on time.
3. It pushes away higher end and smarter tenants. People that are well to do just want a price and don't want to worry about what months they have to pay. They also may think its a scam and look the other way because they know there may be a "catch".
Ex: Are you going to hire a painter that gives you a fair price? Or do you hire one that will say if he gets the current job he will give you half price on your next job?
4. It limits your pool of tenants because you will be advertising at a higher price range (as previously mentioned).
Also, if you are going to implement this you might as well up-sell and charge $990 to make it an even number and make an extra $8 per month. I do like the fact that you can sneak an extra month rent in there but they are NOT going to be happy when they have to pay the 12th month. And I think the goal is to create happy long term tenants and I think that this strategy may take away from that.
Also, when you give in because they beg for the 12th month free it may give them confidence to take advantage of you in other areas.
@Kyle M. Some very good comments there. I definitely see your point about them NOT being happy when they have to pay the 12th month, just because they were a few days late with the rent. I could see that causing problems.
I'll definitely have to think this through before I decide to (or not to) implement it. Thanks for your comments.
It appears you've gotten some great feedback and I don't want to regurgitate what's already been said. I think it's a phenomenal idea and a really great way to create an incentive for the tenant without costing yourself any money in the process. If you decide to use it please post again letting us know how it goes. Best of luck!
Account Closed I don't know how many rentals you own, but if people are willing to pay 9% more for your unit, then it may be time to look at all of your rents and raise them by let's say 5% across the board. This would only tell me that the unit is under-rented to begin with.
Account Closed I like the idea but would question how many people are good at associating far off rewards/consequences with their current choices (as in, if I pay on time now, I'll get something 10 months from now). Particularly people who are earning an appropriate income but are inclined to pay late anyway aren't the best at this, otherwise they might be stronger at budgeting.
An idea I heard that was similar that seems like a good one to me (and offers an immediate benefit to the tenant) is to raise the rent by, say, $20, and then offer a "paid on time reward" of a $20 discount. This is actually more a less a different way of describing a late fee, but it sounds much better somehow! Also, this gives a way to collect late fees in an area where they are not able to be included when suing for back rent.
I do $10/day late fees, so in this example, on day 2, the tenant would lose the $20 discount, on day 3, would owe a $10 late fee, on day 4, a $20 late fee, and so on. (I do cap the late fees at a certain point, but have never hit that point with any tenant.)
That being said, I don't actually implement this idea personally because I want to be able to advertise the lowest rent possible. I do my best to avoid or manage potential late payers in other ways.
@Kyle M. @Stephen E. @Nancy Larcom Some very good points on the downfalls of offering a free months of rent that I never thought of. I have a single-family up in Northern New York state has been vacant since beginning of December. That is pretty much a death sentence for a landlord because frigid temperatures combined with FEET of lake effect snow all the time does't motivate anyone to move. My only hope is someone who is being transferred to nearby Fort Drum, but usually the military moves people in the summer months.
I started to advertise the property in mid-December with the first month of rent free, thinking that people only have to come up with the security deposit in order to move in. I raised the rent $100 to cover that, has been lots of interest, but no takers so far. After reading this stuff I think I will not offer the free months rent anymore and charge market rate, in a soft rental market I don't think the free month works, and will just attract deadbeats that will cost you more anyway.
@Account Closed Why not offer a two year lease at your proposed rent or just a little bit under that (if the market will bare it, of course) I think that's a better course of action due to the better quality tenant you'll more than likely get. Just an alternative to your scenario.
I do not like using the words "free rent" in my business. I don't need people thinking my units are cheap. Just an opinion.
@Steve B. everyone likes free things/discounts... If it means one month less vacancy to offer something like that, even without raising the rent for the other rents, you've broken even. I'd be a little hesitant to collect too little rent up front under the theory that people who can come up with 2 months rent up front show a sign of financial stability. However, I might offer a 50% first months rent discount in your situation, and possibly additionally offer a larger incentive for those with good credit...
My wife and I were talking about this and both agreed that a full months rent might be a tipping point that if they are late and if they lose that incentive they might just give up and not care as much about the property or you. For us our house rents for $650 per month. We agreed that if we did half off the 12 month but rented the other 11 months for 700 it wouldn't be as drastic of a loss for the tenant if they defaulted but ultimately give us more income per year. And we would only do it for electronic draft tenants. That way there will be no question about receipts of payment.
I've done the free month's rent in the past to combat high vacancy rates in a multifamiy. I didn't raise the rent any because the place would have been empty anyway. In the end, it didn't really work out very well. Low income tenants just can't seem to go 11 months without being late or somehow screwing it up. But, they still expected the free rent. It just got to be too much of a headache so we quit doing it. I really didn't see that it helped vacancy all that much either.
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