The unit sat for six weeks. You dropped a concession into the listing, two months free on a twelve month term, and it rented in nine days. The lease says 1,600 dollars a month and it is signed and the tenant is in.
Then the underwriter asks for the lease, reads the concession rider, and the rent your file runs on is not 1,600 dollars. It is 1,333 dollars. Nothing about your property changed. The number your loan is sized against just dropped by sixteen percent.
This is one of the most common surprises on a freshly leased rental, and almost nobody models it before they sign the concession.
What counts as a concession
A concession is anything of value you give the tenant to sign, that reduces what they actually pay over the term. The common ones:
- One or two months free, usually the first month or the last
- A reduced first month, half off at move in
- Waived or reduced security deposit
- A move in credit paid back to the tenant
- Free parking, free storage, or utilities you normally bill back
- Paying the tenant’s moving costs or a broker fee the tenant would otherwise owe
- A signing gift, including gift cards and appliances
Note what is not a concession. Seller credits at the closing table are a different animal with different rules, covered in seller concessions and credits. Those change your cash to close. Rent concessions change your income. Underwriters treat them separately and investors mix them up constantly.
The conversion the underwriter runs
The arithmetic is not complicated. Total the rent the tenant will actually pay across the full term, then divide by the number of months in the term.
Twelve month lease at 1,600 dollars with two months free. The tenant pays ten months at 1,600 dollars, which is 16,000 dollars. Divided by twelve months, effective rent is 1,333 dollars.
That 1,333 is the number your coverage ratio runs on. Not the 1,600 printed at the top of the lease. If you want the mechanics of the ratio itself, start with how to calculate DSCR.
Some programs go further and apply the concession against a shorter window, treating a two month giveaway on a twelve month term more harshly because the lender is sizing a thirty year loan off a one year lease. Others cap how much concession they will look through at all. The direction is always the same: concessions come out of income, never out of expenses.
Worked example: the deal that stops clearing
Purchase at 168,000 dollars, 75 percent loan to value, loan amount 126,000 dollars. At 7.25 percent on a thirty year amortization that is about 860 dollars of principal and interest. Add 200 dollars of monthly taxes and 100 dollars of insurance and the housing payment is 1,160 dollars.
On the face rent. 1,600 divided by 1,160 is 1.38. Comfortable, well clear of a 1.20 floor, the deal you underwrote when you made the offer.
On the effective rent. 1,333 divided by 1,160 is 1.15. Below the floor. The file does not close as structured.
The fix is a smaller loan. To reach 1.20 the housing payment has to come down to about 1,111 dollars, which means principal and interest near 811 dollars after the 300 dollars of taxes and insurance, which means a loan of roughly 118,900 dollars.
You are bringing about 7,100 dollars more to the table than you planned, because you gave away 3,200 dollars of rent to fill the unit faster. That is the trade in plain numbers, and it is worth knowing before you make it rather than after. Run your own version in the DSCR deal calculator before you publish the listing.
One month free is a different conversation
Same house, one month free instead of two. The tenant pays eleven months at 1,600 dollars, which is 17,600 dollars, or 1,466 dollars a month effective.
1,466 divided by 1,160 is 1.26. Still clears a 1.20 floor with room to spare.
So the practical rule on a file you are about to finance is not avoid concessions. It is know where your ratio breaks and stay on the right side of it. If you have 1.38 of coverage at face rent and a 1.20 floor, you can give away roughly one month on a twelve month term and still close. Two months puts you under. That is a calculation you can run in sixty seconds before you agree to anything.
Where the 1007 lands in all this
Your lease is only half the income picture. The appraiser also delivers a market rent opinion on Form 1007, and most investor programs underwrite the lower of actual rent and market rent. The logic behind that convention is laid out in the appraiser’s market rent opinion, and the same lower-of discipline is what cuts investors on a below market tenant.
Here is the part that catches people. If the 1007 says market rent is 1,525 dollars and your effective rent is 1,333 dollars, the lender uses 1,333. The lower-of rule does not rescue you, because your own concession made you the lower number. A strong 1007 is a ceiling, not a floor.
There is a quieter consequence too. Heavy concessions in a submarket show up in the appraiser’s rent comps, and when every landlord on the block is giving away a month, the market rent opinion itself drifts down. Concessions are contagious that way.
What underwriting asks for
Expect some combination of the following, and expect the request to arrive late, because the concession is usually buried in a rider rather than on page one:
- The full lease, including every addendum and rider. Sending the main body and leaving out the concession rider does not work and it costs you three days when they ask for it.
- A rent roll that reflects effective rent, not face rent.
- A tenant estoppel certificate on larger or seller-provided leases. That document exists precisely so a lender can confirm what the tenant believes they owe. See the tenant estoppel certificate.
- Proof the free month was actually taken, or when it will be. A concession scheduled for month twelve still counts.
- Bank statements showing the deposits. This is where a concession you forgot to disclose gets found, because the deposit history does not match the lease.
That last point deserves emphasis. Do not paper a lease at the face rate and quietly rebate the tenant. The deposits will not support it, the file will be re-underwritten, and you will have handed your lender a reason to question everything else in it.
When a concession is the right call anyway
Sometimes it is. Two months free is cheaper than four months vacant, and vacancy has costs that never appear in a ratio at all. The gap between closing day and the first rent check is its own problem, laid out in the rent-ready standard and the vacancy clock.
The case for a concession over a rent cut is also real. Dropping face rent from 1,600 to 1,350 resets your rent floor forever and every renewal negotiates up from the lower number. A one time concession keeps the headline rent intact for next year’s lease and for the next appraisal. That is a legitimate strategy, it is widely used, and it is exactly why underwriters look through it.
The timing fix is usually the simplest one: finance first, concede second. If the loan is already closed, a concession on next year’s renewal does not touch it. If you are closing in three weeks, structure the deal so the free month lands after funding, or price the concession as a lower face rent you can actually carry.
Related situations worth knowing
A few neighbors of this problem come up on the same files. Whether you even need a signed lease at closing is covered in the DSCR lease requirement. A unit with no written lease at all is a month to month tenant. A tenant already behind is a delinquent tenant file. A single operator holding the whole building on one instrument is a master lease, where concessions are negotiated at the operator level and rarely show up as free months at all. And vacancy and management factors are a separate haircut in why lenders use gross rent. Property type matters too: concessions are far more common on manufactured and modular rentals and on properties with the layout problems described in functional obsolescence, because those are the units that sit, and a unit that sits is a unit you end up discounting.
The larger the concession you had to offer, the more carefully you should look at why the unit needed it.
How we handle it
We ask about concessions during the quote, not during underwriting, because the whole point is to catch it while you can still change something. If you tell us you are about to offer a free month on a property we are financing, we will tell you in a few minutes whether the file still clears and what it costs if it does not.
We place loans on rentals and flips for investors across Pennsylvania and additional states, and leasing is a different business in every one of those markets. If you want someone to run the effective rent math before you sign a concession rider, reach out or call 412-990-2941.
FMC Capital is a Pittsburgh-based mortgage brokerage serving real estate investors. NMLS #1840537. Rates, terms, program floors and concession treatment vary by lender and by file and are subject to change. Nothing here is a commitment to lend.