Everyone knows there are amazing new york rental deals this year. Luxury buildings giving 4 months free on a one year lease. Never-before-seen perks, no broker fees, gift cards, the works. That’s all fine and consumer-friendly for this year. But how about next year?
First, let’s find a typical luxury one bedroom building. The net effective rent is $2,535, after receiving 4 months free on a 14 month lease.
You might wonder why buildings are going for 4 months free on a 12 month lease as opposed to simply lowering rent. For one, there is the classic accounting trick. That 1 bedroom in Long Island City will still show up on the books as a rented apartment for $3549 a month – the gross rent.
The four months free they gave, amounting to $14,000, will be “charged” to the marketing department. They also likely paid the broker fee. There sure is a lot of extra marketing dollars being spent during the pandemic!
The Renewal Trap
Ok, so they like to trick the accountants and investors. Does that matter to a consumer who is getting a great deal? Yes! Because, the amount on your lease will still say $3549 per month (it will also have a lot of legal language around the net effective rent during those 14 months). However, what happens when it comes time to renew?
Well, if you do nothing at all, in theory your rent suddenly skyrockets up to the gross rent. Some leases are written as reverting to a month to month lease after the initial period, and the burden is on the consumer to terminate with enough notice.
Your rent could jump 40% from $2535 net effective to $3548 next year!
Will most landlords actually try that? Probably not. They will most likely try to get you to sign a new lease renewal when the time comes. However, the baseline for negotiation is not necessarily your net effective. It will be something much higher, especially if NYC rentals are back in high demand come 2022.
What Do We Recommend?
First off, if possible it’s a win-win to lock in a longer lease today. As long as you are somewhat optimistic about the vaccines and pandemic ending in 2021, we should see a return back to the NYC we all love over the coming 12 months. The landlord would also be foolish not to allow a longer term lease – perhaps not the full net effective for 24 months, but something in between that should reduce uncertainty for both sides. If you can actually find a landlord willing to give 8 months free on 28 months, by all means go for it!
Look carefully at what happens at the end of the lease period. Does it revert to month to month? At what rental rate? Can you make the default the net effective instead of the gross (probably not, but it’s a talking point)? Even if the housing situation is more landlord friendly 14 months from now, most landlords still prefer not to have vacancies. They want to avoid paying broker fees again, or doing all the work required to repair, lightly renovate, and market yet another apartment. You might be able to maximize your optionality by agreeing to the minimum lease term, but then reverting to some reasonable month-to-month tenancy afterward. Even if the landlord insists on a new lease, you have an anchor price that is hopefully much lower than the $3548.
