Rent is a payment made by a tenant to an owner for the right to use land, buildings, equipment or other property for a period of time, without buying it. The most familiar form is housing rent paid by households to landlords, but businesses also rent offices, shops, warehouses, vehicles and machinery. Rent is a major household expense, a large component of inflation measures and an important source of income for property owners and investors.
In economics the word has a second, technical meaning. Economic rent is any income above the minimum needed to keep a resource in its current use, whether earned by land, labor or capital. The rent a tenant pays, sometimes called contract rent, may contain some economic rent, especially in places where land is scarce, but the two are not the same. For a business, rent is usually one of its main fixed costs.
Rent in plain terms
Renting is like borrowing something useful and paying a fee for each month you keep it. A tenant gets a place to live without having to raise a large deposit or take on a mortgage, and can move on more easily. The landlord gets a steady income from a property they own but are not using themselves.
The price of renting depends on how many people want homes in an area compared with how many homes are available. In a city with good jobs and little room to build, rents climb. Where homes are plentiful, landlords compete for tenants and rents stay lower.
What determines rent levels
Rents are set largely by supply and demand. On the demand side, population growth, household formation, incomes, employment and the cost of buying all matter. When interest rates rise and mortgages become dearer, more households rent, pushing rents up. On the supply side, the housing stock changes slowly because building takes years and planning rules limit construction, so supply is fairly inelastic in the short run. The vacancy rate, the share of rental units standing empty, is a closely watched gauge of how tight a market is.
Investors compare rents with property prices using the gross rental yield:
Annual rent is the total rent received in a year and property price is the purchase price. A flat bought for $400,000 that rents for $2,000 a month brings in $24,000 a year, a gross yield of $24,000 ÷ $400,000 × 100 = 6%. Net yield subtracts costs such as maintenance, insurance, management fees and taxes. Yields that are low compared with interest rates can signal that prices are high relative to rents.
Rent in inflation statistics
Housing costs are among the largest items in price indexes. In the US Consumer Price Index, the Bureau of Labor Statistics measures rent of primary residences and also estimates owners' equivalent rent, the amount homeowners would pay to rent their own homes; together, these shelter costs make up roughly a third of the index. Because leases reset only once a year or so, measured rent inflation tends to lag market rents by many months, which central banks take into account when reading inflation data. The UK's Office for National Statistics publishes CPIH, which includes owner-occupiers' housing costs measured by rental equivalence, while the euro area's harmonized index excludes owner-occupied housing. Rents are also often adjusted by indexation clauses tied to such indexes, so that rents keep pace in real terms.
Rent regulation
Many cities regulate rents. "First-generation" controls freeze rents or cap them well below market levels; "second-generation" or rent-stabilization schemes allow regular increases but limit them, often to inflation, and protect tenants from eviction. Supporters argue that regulation provides security, prevents displacement of long-standing residents and counters landlords' bargaining power in tight markets.
Critics, including many economists, argue that tight controls reduce the supply and quality of rental housing over time. A study of San Francisco by Rebecca Diamond, Tim McQuade and Franklin Qian, published in the American Economic Review in 2019, found that rent control helped covered tenants stay in their homes but led affected landlords to cut the supply of rental housing by about 15%, for example by converting units to condominiums, which may have pushed up rents elsewhere in the city. In Germany, Berlin's five-year rent freeze of 2020 was struck down by the Federal Constitutional Court in April 2021 on the grounds that the city lacked the power to pass it. The debate continues, with many economists favoring more building, housing allowances or a subsidy for low-income tenants as alternatives.
Commercial rent and accounting
Businesses usually rent premises on longer leases with periodic reviews. Under IFRS 16 and the US standard ASC 842, most leases now appear on the lessee's balance sheet as a right-of-use asset and a lease liability, rather than only as a rent expense. Owners of commercial property receive rent as investment income, which is why rent levels feed into property valuations and into the tax incidence of business property taxes, which economists argue often falls partly on owners rather than tenants.