The Difference Between Net Effective Rent vs. Gross Rent
It used to be, when you were searching for a rental, you simply looked for a place and signed a lease when you found one. It was easy. Just like everything else these days, renting and leasing have gotten more complex, from security deposits to credit checks to net-zero and modified gross leases.
Many people don’t understand the difference between gross lease vs net lease (sometimes called gross rent vs net rent).
It’s vitally important to understand what you’re getting into before you sign on the dotted line.
What Is Gross Rent?
So, what is gross rent? And what is a gross lease? Gross simply means the total amount of rent you’re responsible for each month. For most people, it’s a flat fee. But sometimes it includes building fees, association dues, maintenance payments, and other sums all bundled into that rate.
What Is Net Effective Rent?
If gross rent is the total amount you pay monthly, what is net effective rent? Net effective rent takes into consideration any discounts your landlord may extend in a lease. For example, to attract renters in a tight market, a landlord might offer two months free or some other promotion.
Net effective rent is often a more attractive figure than the gross rent, so it gets included in advertisements. It is not the actual fee you’ll pay per month – that’s the gross rent. Make sure you know exactly what you’ll be responsible for on a per-month basis before signing any sort of lease or agreement.
How to Calculate Net Effective Rent
Figuring out your net effective rent requires just a little bit of simple math. Say you respond to an ad where the landlord offers $2000 a month plus two months free when you sign a one-year lease. You take that $2000, and multiply it across the ten months you’ll be paying for, which gives you $20,000. Divide that by the 12 months of the lease, and you get $1,667. This is your net effective rent.
In other words, this is the amount of money you end up paying per month.
Sometimes the landlord will keep it very straightforward and give you two months off where you don’t have to pay anything at all. This doesn’t change the net effective rent for the duration of your lease, of course. Others, though, will expect you to shell out every month.
Again, it’s very important to understand the difference between gross rent and net effective rent so there are no surprises.
Why Use Net Effective Rent?
What’s the point of all this? Why use net effective rent? Landlords see it as a way to offer potential renters an appealing package and stand out in a crowded marketplace.
Not only does net effective rent look good in an ad, but it also has another benefit for landlords – it can convince renters to sign a lease.
33 Realty team knows that many renters these days don’t want to get locked into a lease, preferring to pay as they go. Offering a couple of free months can often entice people to sign a lease agreement.
What to Keep in Mind When Determining Your Rent
The difference between gross rent and net effective rent is just one of the many things to keep in mind when you’re in the process of renting a place. You should also understand the types of rents, and leases, and what it means to renew them.
What Type of Rent
Learn Renewal Terms
Net effective rent also comes into play when you’re renewing your lease. Like internet providers, some landlords will offer you a very attractive package for your first year and then up the rate when you renew.
They’ll pull you in with those two free months and remove them for year two. You’ll find yourself loving life in your new apartment and paying net effective rent in year one. The next year you’re paying gross rent.
Or they may change the terms in other ways. Sometimes they’ll give you a break on maintenance fees or building association fees in year one, and these will be added to your next year’s lease.
The takeaway – know what you’re signing.
Like anything else in the world, it’s important you understand all the parameters before you part with your hard-earned cash. Rent gross, rent net, first, last, security – you need to know your terminology and what you’re being asked upfront.
At 33 Realty, we’ve been helping Chicagoland renters and landlords since 2009. Our staff is experts in all aspects of renting, leasing, buying, and property management. We’d be happy to help you.
Contact us with any questions.