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Sometimes you see a rental property advertised with its “net effective rent.” This figure is the average amount of the rent cost per month, spread out over the total length of the lease and includes any special deals (such as a rent-free month).
Landlords or leasing companies use net effective rent to attract tenants since it makes the monthly rent appear lower than the actual amount owed per month.
What is net effective rent?
When marketing a rental property, some landlords or leasing companies may offer a discount or promotion to make the listing more appealing. Known as concessions, these incentives frequently take the form of a month (or multiple months) of free rent.
However, that “free month” isn’t always what it seems. More often than not, this type of concession really means that a tenant can skip paying rent for a month, but to make up for that free month, they’ll need to pay a higher amount in the other 11 months of the lease.
On these listings, the landlord will often include the property’s net effective rent, indicating the average amount a tenant would owe per month if they were to pay rent during every month of the lease term. But since they aren’t paying rent during all 12 months, the actual amount they’ll send their landlord each month is higher. This amount is known as gross rent.
When is net effective rent used?
Net effective rent often comes into play when it’s a renter’s market — when there’s a glut of properties available, or other conditions exist that make landlords aggressive in wooing tenants. In New York City, for example, it’s typical to see landlords advertise a free month to tenants who sign a 12-month lease, but during the days of the pandemic, some offered even more. In 2021, for instance, one apartment building in Williamsburg, Brooklyn provided five free months on a 25-month lease.
However, net effective rent – and the “free” month of rent – is usually only applied to a tenant’s first lease with a landlord. When it’s time to renew, it’s unlikely that the concession will be honored again unless the tenant negotiates it into their new lease.
How is net effective rent calculated?
When a lessee signs a lease, they commit to paying a designated dollar amount per month of the lease period (the gross rent). While many leases are 12 months long, the leasing party might offer the renter a free month, usually the first or the last, out of those 12 months. When that happens, the tenant’s gross rent remains the same, but they pay it fewer times.
The renter’s net effective rate is the total gross rent for the entire lease period divided by every month in the period, including any free months. Although the total will be the same amount as the gross rent across the entire lease period, on a per-month basis, the net effective rent is actually lower because it’s spread over more months.
The net effective rent exists purely for mathematical purposes; the renter doesn’t actually get to pay that amount unless the landlord agrees to amortize their rental payments, although in that case, they would miss out on the free month. Additionally, it doesn’t include any relevant fees, including the application fee or broker’s fees.
Net effective rent example
Here’s an example of how net effective rent would work. Let’s say Brittany has found a great one-bedroom apartment with the last month free on a 12-month lease. It’s advertised with a net effective rent of $2,500 per month. However, since net effective rent takes into account all 12 months of the lease (and she’s only paying during 11 of those months), she will actually pay a gross rent of $2,727.27 for each month she owes rent.
Whether you look at net effective rent or gross rent, Brittany is paying $30,000 in rent for the year.