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What does net effective rent actually mean and what do I end up paying?

Originally posted on August 20, 2018 2:21 pm
Updated on August 21, 2018 9:33 am

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When you are searching for a new apartment to rent, there are lots of things you will consider before signing on the dotted line. Location, proximity to amenities, how old the building is, and many more factors all go into helping us decide whether to rent an apartment or keep searching for another. For some people, the search is relatively quick, but for others, it can be much longer.

However, the most important thing for most of us is the price of the rent in the apartment. Price will often vary greatly from one neighborhood to another and even one apartment to another. Thankfully, most ads for an apartment will include the price, which can make it quick and easy to filter out options that are out of your range.

However, the price that is advertised might not be as clear as it seems. This is due to the fact that some landlords and agents will use gross rent and some will use net effective rent when deciding which price to post on the ad. Depending on which is used, you could actually end up paying a vastly different amount than you were expecting. And once you sign the contract, getting out of it isn’t always easy, so be sure to know the difference between gross rent and net effective rent, and what they both actually mean. You will benefit a lot in the long run if you are aware of the difference between the two. Now, neither is better or worse, but it is important to know the difference.

Gross rent is quite simple to understand and explain. The gross rent is the combined amount of all the monthly payments. So if you pay $1200 a month, your gross rent would be $14,400. While this isn’t always the case, gross rent might include other costs such as utilities. So if the landlord lists “gross rent” on the advertisement, it is quite simple to know what they are saying.

However, net effective rent can be a little bit more confusing to understand. See, many landlords will offer some kind of a promotion when trying to attract new tenants into one of their units. This is commonly in the form of one free month’s rent. Now, some landlords will just give you the last or second last month free, while others will simply spread out the discount over the entire year.

So essentially, net effective rent refers to the total amount a tenant will pay, including the promotion. So if your gross rent is $14,400 ($1200 a month), but there is a one month free promotion, your net effective rent would actually only be $13,200 ($1100 a month). It is very straightforward to understand, but can involve a bit of math if the landlord or advertisement doesn’t provide you with much information. Basically, you take the total amount of the promotion/concession, divide that by the term of the lease, and then subtract that amount from the monthly rent.

So as you can see, the gross rent on an apartment will almost always be higher than the net effective rent, as it doesn’t take into account any special deals or promotions. However, even if the advertisement shows net effective rent, it is a good idea to do some calculations to figure out the gross rent as well, so you know what you will likely be paying if you decide to renew, as most promotions will only exist for your first year.

Also, when you renew, you will be negotiating based on the gross rent, not the net effective rent, as that included a promotion or discount. Of course, depending on your landlord and their policies, or how good of a tenant you have been, the company might be willing to wiggle a little bit on price and maybe give you a small discount, but don’t expect to get the  “free month” that you had before.

Reading the lease closely is always incredibly important, but that goes double when dealing with net effective rent. This is because the lease is what will tell you how the discount is applied, what your gross rent would be without the discount and more. If you are ever curious about the terms or pricing of your apartment (or any other information), the lease agreement is the place to look.

In conclusion, it is a very good idea to familiarize yourself with the difference between gross rent and net effective rent, as it will benefit you a lot throughout your tenancy. If you are not aware of the difference, paying for rent at the end of the month and renewing at the end of your term could be a little bit confusing.

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