If you’re looking around for an apartment, chances are the top consideration is your budget. The main concern is that you’re only going to be browsing within the range of that set budget.
Say you’re looking at listings that go for $2,500 at most. Then, you finally found the one that not only fits what you’re looking for but you love.
The only catch: it’s a little bit above the $2,500 limit you set for yourself. Say the listing you love is at $2,550. Close, not that much, but it can make a difference incrementally.
Then you spot that the description for it says something along the lines of “net-effective rent for a 16-month lease.”
What exactly does “net-effective rent” mean? And what does it mean for you and your prospective landlord?
The Definition of Net Effective Rent
Net-effective rent is the average monthly rent of a lease period paid by the lessee (you, in this case).
A net-effective rent is not the actual amount you pay monthly. A math equation accounts for the free months stated in the listing, treated as if these months have been paid for.
The net-effective rent can appear on listings. These are designed to draw potential renters toward it. Who wouldn’t be attracted to the proposition of the lower payments that it promises?
A Deeper Look: Net Effective vs. Gross Rent
When you agree to and sign a lease, you are responsible for paying the agreed-upon amount per month of the lease period — no more, no less, down to the cent. This is what’s called the gross rent.
While most leases indicated a timeframe of 12 months, the leasing party (your landlord) might put forward a free month. This is usually the first or last month of the time frame indicated in the lease.
What isn’t in the foreground is that the gross rent you pay will still be the same — just paid in fewer gives.
The NER for renters relates to the total gross rent for every month in the lease, including the free months.
Hence, the total will be the same amount as the gross rent for an entire lease period regardless. However, a per-month net-effective rent is still actually lower since it’s spread over more months.
The net effective rent is just for mathematical purposes — you would not get to pay that amount unless the landlord agrees that your rental payments are amortized.
In that case, though, you would not get the aforementioned free month. It’s also important to note that it doesn’t include any fees, like broker and application fees.
How Is Net Effective Rent Calculated
When you find out that figuring out the net-effective rent consists of a lot of math, you may get too scared to take a peek. Nonetheless, it’s mostly simple math and nothing you can’t handle.
For Landlords:
Several factors come in when trying to determine how landlords calculate the net effective rent. It’s important to know how they arrive at the figures you’re going to pay for transparency’s sake.
Of course, leasing is meant to bring in income, and landlords just want to maximize their revenue while making sure their properties remain accessible. Some are:
- Rent-free months. Landlords help themselves in helping you out. Giving their tenants free months, like a month at the beginning or end of a lease, can be profitable.
- Operating costs. Money splits ways at the hands of your landlord. Some go to them; some go to maintenance. Operational costs cover things like cleaning, repairs, or security.
- Tenant’s Cash Allowance. This is the one-time reimbursement that is used for construction expenses based on your preferences. This covers out-of-build things such as doors, outlets, partitions, and the like.
Now to compute, here’s the equation they generally use.
| NER = [BR * (Term – N) – TA – OC * Term] * 12 / Term, where: | |
| BR | The base rent per month |
| Term | The lease term (in months) |
| N | Free months (as stated on the contract) |
| TA | The total tenant cash allowance |
| OC | The operational costs |
For example, these are the figures your landlord has.
| BR | $3,000 |
| Term | 24 |
| N | 1 |
| TA | $4,000 |
| OC | $300 |
| Then, NER = [3,000 * (24 – 1) – 4,000- 300* 24] * 12 / 24 |
These would set you at a gross rent of $72,000 for the lease term. At net-effective rates, you will only be paying $57,800 for the lease term, at $2408.33 monthly.
For Renters:
The calculation for renters is going to be much simpler than the above. For example:
Harvey found his dream apartment! He signs a lease for this amazing place that says he’ll have to pay $3000 every month. Jessica, his landlord, also gave him the first month for free.
Now, Harvey’s gross rent for every month is $33,000 — $3,000 a month, times 11 months.
Nonetheless, his net effective rent will be $33,000, divided by the 12 months that Harvey is willing to stay in this great apartment.
Effectively, he will only be paying a net effective rent of $2,750 per month. You may be paying a little bit more per month, but since it’s stretched out over time, it makes it feel much more affordable.
Why Net Effective Rent is Important
Net effective net is an important factor in real estate — it’s more than just the marketing tool that some people tend to see.
For Landlords
Landlords need to keep their businesses afloat. Therefore, it is important to reel in new tenants and keep their existing tenants happy.
Landlords use net effective rent to help negotiate a better lease Here’s why NER is important to landlords.
It can help landlords create a dependable leasing strategy.
NER can help set the benchmark for incoming leases. They can watch this as a metric as valuable market insight.
NER helps them create a minimum rental level for incoming tenants, and in turn, helps them keep the business afloat.
It is a measurable metric they can use to analyze normalized information.
- For brokers or leasing teams, NER can help analyze the potential revenue between two leases, even when they are very different leases.
- For the industry, NER can be used as a true metric to assess the value of leases. This can provide deeper insight into market standings and market health.
- For building owners, NER makes it possible to compare the performance of different properties, even on a national or multinational scale.
Net Effective Rent negotiations can help landlords keep a higher base rent.
In negotiations with NER as the metric, landlords can offer incentives to tenants while keeping a high yet fair base rent.
This can help landlords negotiate despite rent escalations that happen off the base rent.
For Renters
For those looking to rent, it can easily be boiled down into two things:
- It makes payments lighter. Yes, you may pay more per month, but in the long run, you’re getting significant savings.
- It can help you compare listings. Incentives are attractive, but if you use NER as a metric to compare listings, you’ll see if you’re not going over budget in the long run.
Tips on Your Rent
Know The Rent Type
Some properties will be advertised with their gross rent, and some will show the net effective rent. Make sure to clarify what type of rent you’re in for.
Before signing anything, ask to see the agreement and check if you’re paying the net or gross rent.
Review The Contract
If you’re not that savvy or still hesitant on signing, ask for counsel from the outside. A fresh set of eyes will always see something that you might have missed.
Ask Questions
If you’re still unsure after all this, ask away. Landlords are more than happy to answer your questions since it shows that you’re interested.
The Lease is Up, What Happens Now?
If you want to stay in your magical apartment, then you’re looking to renew once the lease is up.
It’s important to note that you’re most likely paying the gross rent since these promotions only last until the expiration of the first lease.
Landlords are known to raise rent all the time, so you might want to get into negotiations immediately.
If you’ve been a model tenant, you can roll the dice and re-apply with the same terms or ask for a small discount.
But, as you stay longer, remember that the surrounding area might increase in value or devalue. The rent will go with it.
Remember this rule of thumb: if you’re looking to move out after your lease is up, a gross lease might be better for you than the net effective rent.
Should You Jump at Net-Effective Rent Properties?
Knowing the difference between net effective and gross rent and how they can help you manage your cash flow efficiently.
Without the proper knowledge, leasing can be confusing. Not knowing the difference can mess up your budget in the long run.
Take it slow, ask questions, and scrutinize the lease.
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