Free month of rent or a lower rent: which concession is better?
Compare any two offers as effective rent: the total rent you collect over the lease divided by the number of months. One month free on a 12 month lease at $2,000 is $22,000 collected, or about $1,833 a month effective. Dropping the rent to $1,833 collects the same $22,000. The difference is what each does afterward: a free month keeps your listed rent at $2,000 for the renewal and the next vacancy, but it is spent in one month, so it leaves you exposed if the tenant moves out early.
How to calculate effective rent
Effective rent is the rent you really collect, averaged across the whole lease. Use it to compare any two offers, including a free month, a half month, a waived fee or a gift card.
- Take the monthly rent on the lease and multiply it by the number of months.
- Subtract the value of the concession (free months, a one time credit, a waived fee).
- Divide what is left by the number of months.
Example a made-up unit lists at $2,000 a month for 12 months. Offer A gives month one free: $2,000 x 12 = $24,000, minus $2,000 = $22,000, divided by 12 = $1,833.33 a month. Offer B lowers the rent to $1,850 a month with no free month: $1,850 x 12 = $22,200, divided by 12 = $1,850 a month. Offer A costs you $16.67 a month more in effective rent than Offer B, yet a renter who only compares the headline number sees Offer B as the lower price. Both bring in less than $2,000 a month.
Side by side: what each choice changes
| One month free | Lower monthly rent | |
|---|---|---|
| Rent on the lease | Stays at the full amount | Lower for the whole lease |
| Renewal starting point | Your full listed rent | The lower rent, unless you raise it at renewal |
| Cash early in the lease | Less (one month with no rent) | Slightly less every month |
| If the tenant leaves early | You may have given the discount and not got the months | You only gave up a little in each month you were paid |
| What renters see | A deal, and a sign you want the unit filled | The price, which is easy to compare with other listings |
Neither choice is better for every unit. A free month tends to suit a tenant who stays the full term, because you keep the higher rent on paper. A lower rent tends to suit a tenant who may leave early, or a unit you expect to rent again at the same price.
What happens if the tenant leaves early
A free month is given up front, and you only earn it back by keeping the tenant. If the tenant breaks the lease in month four, you got three months of rent for four months of occupancy.
Example a made-up tenant signs the $2,000 lease with month one free and moves out after month four. You collected 3 x $2,000 = $6,000 for four months of use, which is $1,500 a month. With the lower rent of $1,850, the same tenant would have paid 4 x $1,850 = $7,400 over the same four months.
You can reduce this risk in the lease. Some owners spread the concession, for example a $1,000 credit on month 7 and another $1,000 on month 12, so the tenant earns it by staying. Whether you may take a concession back after a tenant breaks the lease varies by state, so check yours before writing the clause.
Write it into the lease so it is clear
- State the full monthly rent as the rent, and the concession as a separate credit, with the month it applies to. That keeps late fees, increases and the renewal figure tied to a clear number.
- Say whether the free month is month one, a middle month or the last month. A free first month reduces the cash you take in at move in.
- Say what cancels the credit, such as a default or an early termination, and that it applies only where state law allows it.
- Leave the rest of the lease alone. A concession is a price change, not a reason to skip the application or the deposit.
How a concession shows up in your books and taxes
IRS Publication 527 says that if you report on the cash basis you include rent in the year you actually or constructively receive it. A month of rent you waived is rent you never received, so you report the rent you did collect. Record it in your books as a reduction of rent income, so your rent roll still shows what the unit was supposed to bring in.
The same publication says that if you take property or services as rent instead of money, you include their fair market value. A gift card or a service you pay for is an expense, not a discount, and is handled differently. Ask your tax preparer which one you have.
How DoorKeeping handles concessions
Ask Claude or ChatGPT through DoorKeeping to compare two offers on a unit and it works out the effective rent from your numbers. Each property's books keep the scheduled rent and the credit apart, so the rent roll and your owner statements show both. A lease or renewal that carries a concession goes out for e-signature after your one tap approval.
Sources
Questions
- What is effective rent?
- Effective rent is the total rent a tenant pays over the lease divided by the number of months. A 12 month lease at $2,000 with one month free totals $22,000, so effective rent is about $1,833 a month.
- Should I offer one month free or a lower rent?
- If you expect the tenant to stay the whole term and want to keep your rent high for renewals, a free month works. If you worry about early move outs, a small rent cut is safer because you are paid every month.
- Do I report a free month of rent as income?
- Not if you are on the cash basis. Publication 527 has you report the rent you receive, and a waived month is not received. Confirm with your tax preparer.
- Can I make a tenant repay a concession if they break the lease?
- It depends on your state and on what the lease says. Write the term in the lease and check your state's rules before you try to collect.