Incentives are used widely by most industries as a tool to attract customers and increase sales. We have all seen them and heck we may even purchase items just because they come with an irresistible offer... 'Buy one get one free'... 'Buy now and get a free book'...on and on and on... these are all examples of incentives which are being used to motivate and encourage you to take action. Incentives are especially useful in motivating customers which are on the fence about a purchase for one reason or another and may be just enough to 'nudge' them to follow through.
In Real Estate and most notably rental properties however, incentives are not nearly as common as say... your local grocery store specials. Sure you'll find apartment building communities offering the occasional move-in special but as a whole, incentives are largely ignored by most landlords. Most have never given it any real thought and yet others just see incentives as free 'give-aways' with no real upside. However, when used strategically incentives can be your biggest secret weapon in attracting and retaining the best tenants, while also decreasing your vacancy and increasing your cash-flow... don't believe me? Let's find out how.
Observations & Statistics
Observation #1: On average, renters move out most commonly due to factors not influenced by the landlord at all... sorry, but it's not all about us landlords. Factors such as a new job, job transfer, to shorten the commute, to purchase their own home, or to move into a larger unit. Remarkably, fewer than 6% of tenants cited moving because the rent was too expensive, which may suggest that rent increases are not the primary—or even a common—reason for moving out.
Observation #2: A discount on rent is the most preferred monetary incentive. 52 percent of renters say they could be swayed by cash or other types of spendable incentives. Monetary incentive preference: 58% prefer discount on rent; 28% prefer cash; 10% prefer security deposit rebate; 4% prefer gifts or gift cards. However important to note here is that the older in age renters get the more they value property condition and upgrades over a monetary incentive.
Observation #3: Not all incentives have to revolve around the property. In fact, 47% of renters would be more likely to renew their lease if offered a membership to a local gym. Just behind gym memberships are subscriptions to a grocery delivery service. Gym memberships and covered parking are the most preferred non-monetary incentives. Just behind gym memberships are subscriptions to a grocery delivery service.
Observation #4: Somewhat surprisingly, just 27 percent of renters would stay if offered a unit upgrade, such as new flooring, lighting or a paint job. New kitchen appliances are often not as appealing as a more practical, whole-unit or rental property upgrades; renters prefer unit upgrades that make a big impact in appearance. Unit upgrades preference is split equally between: new kitchen appliance; new carpeting; and new washer/dryer. Still desirable but not as much: new paint.
Observation #5: A television, and just behind it, other tech tools such as a tablet computer seem to be sought after. It's interesting to note that men greatly prefer a TV in comparison to women. 11% of renters would choose free transportation and, 13% would choose a one-time prize rather than an ongoing service: ‘free tickets to a local event.’
Observation #6: Most renters have pets. Some experts estimate that as many as 63% of renters have pets and thus will only consider pet friendly apartments and amenities. Additionally, a considerable 10% of renters would renew their lease if allowed to have a pet.
Using Incentives to Increase Cash-Flow
Okay, so we get that incentives obviously attract renters but, does it make sense? I mean there's no point in offering an incentive to a renter that is not willing to value it. Understanding which incentives are the most sought after by renters is closely correlated to which amenities are most appreciated. The amenities below give a property the opportunity to command higher rents.
In Unit Washer & Dryer: A privilege that 3 in 5 residents would be willing to pay higher rent to have—especially Millennials. In addition, 15% of residents who are considering moving out say that one additional appliance would change their minds.
Central Air Conditioning: Another amenity that 3 in 5 residents would pay higher rent to have, across every generation. If you do have central air, make sure that you highlight it in your rental listings and that you maintain the system over time so that it doesn’t cause expensive issues down the road. If installing an HVAC system isn’t feasible within your properties, consider how you can make your unit more comfortable in the warmer months—for example, by providing window units and fans for residents to use.
Balcony, Porch or Patio: Something that half of all residents would pay to have access to, regardless of their age. Not having a private outdoor space is a major downside of renting; so consider how you can create places where residents can relax or gather outside within your community.
A Dishwasher: A top amenity for a majority of residents. More than 2 in 5 respondents said they’d pay higher rent for a unit with a dishwasher.
Extra Storage Space: Increasingly important to renters as they grow older and accumulate more belongings. If you have the opportunity to increase closet size or add shelving to help residents stay organized, that can be a selling point for your units. If your units are already pressed for space, however, keep in mind that 1 in 4 respondents would pay higher rents for storage space located elsewhere onsite.
Garage Space: A definite plus for renters especially for those in colder climates such as Michigan. This option not only keeps residents' vehicles out of the elements but residents will value it when they don't have to trudge through the snow to get to their hot wheels.
"Incentives are a powerful tool to help your property stand apart from the crowd, make your tenants happy, help streamline your operation and increase your bottom line."
Using Incentives to Knockout the Competition
One of the best plays when using incentives is to not only use them to 'upgrade' your rental but to also address a renter's concerns while increasing your bottom line. Many landlords feel as though they are unable to compete with larger apartment complexes or communities which offer gyms, spas, pools and other amenities. However, nothing could be further from the truth, you can not only 'out do' many of those offered amenities but you can clearly standout from the competition and tailor your amenities and incentives to your applicants... which is something the 'big guys' rarely have the ability to do.
For example, let's say you have one of the best single family rentals around but it sits further from the beaten path than you would like. The feedback from your showings is a constant stream of the same... 'It's just too far from town' or 'It's a bit further from work than I would like'. This would be a prime opportunity to use your incentive power... perhaps a pre-loaded gas card would help alleviate many of your applicant's concerns. They have seen your rental... heck they even came out to look at it and if that is their only concern a gas card may be just the thing to win them over, turning a negative into a positive.
Another scenario... let's say you own a duplex within proximity of many bigger apartment buildings, your applicants tend to be younger and are used to the amenities offered by the 'big guys' so much so that you're finding it hard to compete with them, why not offer a gym membership for 6 months? for one year? Gym memberships can be relatively inexpensive ($200-$300) in comparison to vacancy and just like that you have increased the value of your rental in a way that the bigger apartment buildings can't compete... after all your rental is much more private and now offers a dedicated similar but superior amenity.
Okay, one more... You have a rental property which is in good condition but could use a bit of updating. You could... 1) perform your upgrades and lose out on cash-flow during the renovation or your could... 2) offer an 'upgrades' incentive whereby you offer different types of upgrades to your tenant in return for timely payment, electronic payments, etc. Upgrades such as light fixture replacements, appliance upgrades, bathroom and kitchen upgrades, flooring upgrades can all be part of an 'upgrades' incentive. The win/win here is that you get to upgrade your unit while it is occupied and which will command higher rent the next go around and your tenant is happy being able enjoy your upgrades at the current rent price.
When to Use Incentives & Limits
You have your incentive plan and are now excited to roll it out and attract the best possible tenants but wait... there are certain limits and there is strategy to keep in mind. It should go without saying but your incentives should only be used when absolutely needed, after all there is no need to offer an incentive if the demand for your rental is already there.
Secondly, your incentives should always be coupled with requirements that must be met in order for the tenant to qualify for the incentive being offered and you should always seek to better your position through these requirements. For instance, if you are offering a free month's rent, you should consider spreading out the discount over the course of a year and only apply it for payments which are made on time, the tenant gets the incentive and you get the added assurance that payments will be made on time and that your tenant won't take advantage and break the lease as soon as the incentive is over. Another example is an upgrades incentive program, perhaps to qualify, a tenant's payments must be received on time or they must be made electronically; the tenant gets an updated property and you get to lessen your workload of having to collect the occasional physical payment.
Timing! Some incentives need to be timed correctly for example, an incentive offering free lake access would be much more valuable in the spring and summer months, whereas an incentive offering free heating would be valued in the winter. Additionally, incentives can be used as a bargaining tool during new lease ups and lease renewals. Keep them close to the vest and pull them out and offer them when needed to win over a good applicant or tenant.
Dollar limit, yes here we are... the part that has been on your mind. The average turn-over cost is typically around $650! Yep, when you factor in all the cleaning, vacancy, and work to find a new applicant that is what you're looking at when a unit goes vacant, and quite honestly it may be more. So let me ask you... If a gym membership of $250 keeps your good tenant happy and leads to a renewed lease or if free Wi-Fi at $300 for the year helps decrease the vacancy on your $1,500/mo. rental by two weeks while also allowing you to increase rent by $25/mo., would it be worth it?... Of course it would, especially if it helps you retain or place a good tenant (underlined for emphasis). So figure out your incentive limit according to your turnover costs and vacancy factor and set it within that range... sorry but $2,000 TV's probably won't help to increase your bottom line.
Final Word
By now you should get the point and have a few examples to help get the wheels turning. There are countless types of incentives, rent discounts... free utilities... free wi-fi... upgrades... free storage... etc., etc., etc. However, whatever the case, you should ensure that your incentives:
Address a weakness in your listing
Address a known applicant/tenant concern
Are a benefit to you and your bottom line
Help you streamline your operation
Your incentives are a powerful tool to help your investment property stand apart from the crowd, make your tenants happy, help you streamline your operation and increase cash flow.
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About Ricardo Reis
Ricardo is a member of G3 Management & Investments and a real estate professional. He has been a successful property manager and real estate investor for over 10 years.