This article will explain the difference between gross rent and net rent, how to calculate net effective rent, and why landlords use these terms. Understanding these can help you make better decisions when renting an apartment.
What Is Net Effective Rent?
Net rent refers to the actual cash flow a unit produces minus expenses or adjustments. Owning a property comes with overhead expenses like taxes and maintenance. Plus, landlords will offer incentives such as a free month’s rent to entice renters to sign. The net rent refers to the amount of money paid by the tenant once these fees and adjustments have been factored in.
What Is Gross Rent?
Gross rent refers to the amount of money the tenant pays each month before fees and adjustments. So whatever number the tenant writes on their rent check or has withdrawn from their bank account is the gross rent. The net rent is calculated by subtracting fees from that number.
Gross Rent vs. Net Rent Difference
Gross rent refers to the amount you’re actually paying to the landlord each month, while net rent or net effective rent refers to the actual amount you’re spending per month over the life of the lease after concessions like free rent have been factored in. Net effective rent is essentially your average monthly rent.
Landlords and agents often use net effective rent to incentivize renters to view the apartment. It’s a similar logic as listing an item in the store at $9.99 instead of $10 because psychologically, it feels like you’re spending less money. Although apartments with net effective rent will save you money in the long term, you’re still paying the gross rent on a monthly basis and you typically won’t see the savings until the end of the lease term.
How Do You Calculate Net Effective Rent?
Net effective rent is calculated by dividing the sum of your monthly gross rental payments by the entire lease term, including any months of free rent. For example, let’s say you’ve signed a 12-month lease, which includes a free month for $2,500 a month. Your gross rent is $2,500, which you multiply by 11 months to get $27,500 (the total rent paid). To get your net effective rent, you divide $27,500 (the total gross rent paid) by 12 (the entire lease term, including the last month, which is free).
The result is $2,307.69, which would be your net effective rate. However, you would still cut a check for $2500 each month, except for the final month of the lease, which is free.
Is Net Effective Rent Worth It?
The important thing to understand about net effective rent is that it represents a temporary rental amount that is likely to increase once your free rent promotions expire. If you’re planning on moving at the end of your lease, it’s worth signing a deal with lower net effective rent thanks to a promotion like a month of free rent. On the other hand, if you plan on renewing your lease agreement, be prepared to pay significantly more long-term as your actual monthly rent payment will be much higher than your net rent.
Why Is Net Effective Rent Advertised?
With housing prices in cities like New York being so steep, landlords often use move-in specials and concessions to attract tenants. One of these strategies includes offering a free month if the tenant agrees to sign for a certain period. For example, many landlords will offer 1 free month on a 13-month lease, which means that you get to stay in the apartment for a free month after paying rent for the entire year.
These types of leases are typically advertised at the net effective rent, which means the price reflects the savings of that additional month. This is a common practice as it helps a property owner attract more tenants and can help rent a vacant unit out quickly without having to offer a lower rent payment that might be harder to increase after the first year. Advertising the net effective rental rate is simply a great marketing tool for landlords and their real estate agents.
Why Is Calculating Net Effective Rent Important?
Calculating net effective rent is important as it gives prospective renters a better idea of their costs over the term of a lease. If they receive large landlord concessions like multiple free months, the base rent might seem 15% to 20% higher than the net rent, which better represents their costs.
However, prospective tenants need to keep in mind that the net effective rent is not what you’ll be paying each month. So, you should still budget accordingly. If you see an apartment being listed at a net effective rent, it’s important to calculate the gross rent as well to fully understand your financial obligation.
Net Rent vs Gross Rent Bottom Line
While net rent may make a unit sound more affordable, you'll still need to consider the gross rent when budgeting. If you can’t afford the gross rent monthly, you might not want to choose that apartment just to save some money, as rent concessions don’t tend to be permanent.
The free month of rent is often dependent on you making all your other rent payments on time throughout the year. If you are late or miss a payment, you can still be charged late penalties and may even be evicted before you can enjoy that free month. So, it’s best to mentally and financially prepare for the gross rent and relax when the free month comes around.