Rent Concessions: How Free Rent Changes Effective Rental Income
Learn how rent concessions work, calculate effective rent after free months or discounts, and underwrite their impact on rental property cash flow.
By David Chen, Buy-and-Hold Investor · Last reviewed: August 23, 2026 · 7 min read
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What Is a Rent Concession?
A rent concession is an incentive offered to attract or retain a tenant. Common forms include one or more free months, a reduced monthly rate, waived application or parking fees, a move-in credit, or a landlord-paid service.
Concessions can reduce downtime and preserve the advertised rent, but they reduce the revenue actually collected. Investors should distinguish the face rent written on the lease from the effective rent after incentives.
Calculate Effective Rent
Effective Monthly Rent = (Total Scheduled Rent - Concessions) / Lease Months
For a 12-month lease at 2,000 dollars per month with one month free, scheduled rent is 24,000 dollars and the concession is 2,000 dollars. Effective rent is about 1,833 dollars per month.
If the concession is paid upfront but the tenant pays 2,000 dollars in later months, cash receipts will be uneven. Track both the lease economics and monthly cash timing so reserves cover the free period.
Concession vs Vacancy
A concession can be rational when its cost is less than another month of vacancy plus turnover and marketing costs. Compare likely revenue under each option instead of treating every discount as a loss.
Repeated concessions across a market may signal that asking rents are above what tenants will pay. In that case, underwriting the headline rent and calling the concession temporary can overstate future NOI and value.
How to Underwrite Concessions
- Review signed leases and identify every free-rent period, credit, and waived recurring charge.
- Calculate effective rent over the enforceable lease term.
- Do not count both a concession loss and the same lost rent as vacancy.
- Model whether the incentive must be repeated at renewal or for the next tenant.
- Stress-test NOI and cash flow at collected rent rather than only asking rent.
Track the Right Signals
Monitor gross potential rent, concessions, bad debt, vacancy, and collected rent separately. Combining them into one unexplained loss line makes it difficult to see whether pricing, tenant screening, or physical occupancy is the problem.
When buying a property, ask why concessions were used and whether they recently increased. A full building can still have weak economic occupancy when free rent and uncollected balances are doing the leasing work.
Frequently Asked Questions
Is one month free the same as lowering monthly rent?
The total lease revenue can be equivalent, but timing and renewal behavior differ. A free month preserves the stated face rent, while a lower monthly rent spreads the discount across the lease.
Do rent concessions reduce NOI?
Yes when they reduce rental revenue collected. Lower effective gross income flows through to lower NOI if operating expenses are unchanged.
Should concessions also be counted as vacancy?
Do not double-count the same lost income. Track physical vacancy and concession loss separately, then calculate effective gross income after both distinct effects.
David Chen · Buy-and-Hold Investor, Denver, CO
David is a long-term rental investor who manages a portfolio of buy-and-hold properties. He writes from the operator seat about expenses, reserves, and the numbers that decide whether a rental actually performs.
Educational Disclaimer
All calculations are estimates for educational and planning purposes only. PropertyFlowTools.com does not provide financial, tax, legal, lending, or investment advice. Verify calculations and consult qualified professionals before making property or financing decisions.