The Free Month Syndrome

If your town paper isn't filled with rental offers of a free month's rent (or more) to new tenants, consider yourself lucky. This bane of the rental business flourishes like pizza coupons in many communities. The question is whether this is a game you have to play, and if you have to play it, how do you play it smart?

The free month offer is, of course, something to avoid if at all possible. It's throwing away money if you don't have to do it, but there are other downsides. We have found, consistently, that the quality of tenant is lower overall with those who respond to free month offers. In fact, the worst tenants in town will be among the first to respond to your free month deal. These are often the serial tenants - ones who move every few months - who figure that free month looks like it's just the thing for them (since they're a month behind where they're at anyway). These folks will take that free month, maybe pay a month or two, then quit paying while they plan their next move. If you do offer a free month's rent, prepare to look extra hard at the applicants.

Going to a free month seems an easy out to many landlords - they know the tenants often can't come up with both deposit and first month's rent, so this helps lower the hurdle. It can be even more extreme; right now there is an apartment complex near me that advertises "$89 Gets You In", and I have tracked quite a number of my former deadbeats down to this complex later. They'll take anyone, don't do background checks, and they are in court all they time with evictions of these folks they never should have rented to in the first place. Even keeping the $89 deposit (whoopee), the losses in cleanup and damage alone make these tenants typically big money-losers (people who don't take care of their finances well tend not to take care of your property very well either).

The first thing when looking at all the "free month" competition is not to panic. It doesn't mean that you won't be able to rent your properties without giving in. There are many factors that go into a tenant's decision - location, condition, monthly price, etc. Better tenants will tend to focus on these factors a little more than someone who is financially desperate. People will also tend to figure out over time that the complex with the ridiculous special isn't always a nice place to live - you're going to have neighbors that are less than desirable since most serial renters also have constant scrapes with the law. Next, try to gauge how you stand in relation to your market on vacancies and rates. Ask around, call some of the ads (often there is a gimmick or catch to ones that advertise specials), drive around looking at the "for rent" signs. If your vacancy rate is higher than average, it is time to consider action. However, there are still things you can do before giving away free months. Consider investing some money in more aggressive advertising. How much more can you do with that money you would simply give to the tenants? A bigger sign (maybe a large vinyl banner on the side of the building if it faces a well-traveled road), a larger ad in the paper (or maybe put the ad in more than one place), put fliers up on bulletin boards, get a good website going, etc. Sometimes a simple sign in the yard is enough, but when times get tough you can generate more inquiries with better advertising. Also consider a "bird-dog" program, where you reward current tenants with money off ($50, $100) their next month's rent if you lease to someone they recommend you to. When tenants recommend you to friends, you've got a high chance of a) making the sale and b) getting a decent tenant, since your current tenant isn't likely to want to bring in someone they know will be bad neighbor. Finally, before going to free months, take a look at your monthly rent. This amount has a bigger psychological impact on tenants per dollar than the free month does. For example, many will consider renting something at $25 a month less to be a big deal, and yet if you're talking about a $600-a-month rental, it would take two years for that $25 to add up to the amount you'd give away with one free month. Even if you offered a special where you lowered the rent by $50 a month, it takes a year before the tenant is saving more than the free month would have. This is a much better long-term investment for you, especially compared to someone who takes the free month and is gone a few months later.

Next time, we'll look at how to handle the free month program if you just can't avoid doing it.