Should I take my landlord's variable rent rate offer?

Question

My apartment complex's landlord sent out an email to everyone, offering to change our rent amount to the following:

$400 per month paid via check, plus 10% of monthly post-tax earnings, set up via direct deposit.

This is an optional program, and they said they would draw up a new rental agreement for us to sign if we're interested. Currently I make $52k and pay $800/month, and my paychecks are around $1525 bimonthly, so my rent would decrease to $705 under this program. Also, if I get laid off my rent would decrease substantially - I'd file for unemployment, but it'd likely be significantly lower than what I make now. If I stay employed, there's now a greater incentive for me to increase my 401k contributions as well. The only downside I can see is if I suddenly move to a higher-paying position in the same city, which seems unlikely.

This feels somewhat sketchy though. What would you recommend doing?

Answer 1

From a pure cost/benefit perspective, it sounds like a good deal for the current economic environment. However, there are a few considerations to keep in mind

1. What is the term of the new rental agreement in question? If it is a typical 6-12 month agreement, and you you feel the odds of getting a pay bump to put you at a higher rental rate is low, then go ahead. If it some long period (say 2 years or more), then don't. You'd effectively be selling your landlord a call option on your future earnings potential
2. How much do you value your financial privacy? I'm guessing you'd have to disclose your W2 or offer letter or something from your employer stating your salary. If you think $95/month is worth opening your books you a third party, then go ahead.
3. How secure are you at work? If you feel there is a high likelihood of you losing your job in the coming months, then this sounds like a good deal. You should however price what your rent looks like under unemployment to figure out what your cost savings will be and determine if its worth it.
4. How clear and specific is their offer on what post-tax earnings are? Is it limited to your work related income or to ANY income you earn? While you might not be expecting any other income in the time frame in question, you shouldn't gloss over this. You might decide to invest in something that makes a ton of money, or inherit something from a relative...or any number of other possibilities that could result in unexpected income.

Whenever someone offer you a deal...any deal at all, but most especially when its a non-standard deal like this, you should put in every effort to try to understand their motivation. What do they stand to gain? Is this structure supposed to help them weather a storm or is there some tricky part of this that could result in a windfall for them?

Call and ask them as many questions about this that pop into your mind...something might slip or stand out to clarify things. And when you're done with that, make sure you have a lawyer review the contract.

EDIT: @mkennedy brings up a good point in the comments.

A further clarification to post-tax...is it clear that this means your take home pay i.e. gross salary after ALL taxes (federal, state, medicare, social security and any other you might pay e.g. city taxes) taken out of your paycheck? What about other deductions that reduce your take-home pay e.g. health benefits cost, 401k contributions etc...especially when these can be changed by you? There could be some friction down the line if these things are not clear to both parties up front.