unit 5D<\/a> advertised with a net effective rent of $3106. In the description, we see them explain that the quote is the net effective rent. The gross rent is $3549.38 with 1.5 months free. How exactly is the gross rent and net effective rent calculated?<\/p>\n\n\n\nTo start the analysis, realize that MOST, but not all, net effective rents are calculated on a 12-month pre-promotional duration. To get the post-promotional duration of the lease, you take the pre-promotional duration and add the number of free months. For those familiar with venture financing deals, it is similar to the way investors quote pre and post money valuations. <\/p>\n\n\n\n
Here is the problem – not all broker blasts are clear on the required durations, but will quote the gross, net effective, and number of months free. That leaves the real estate broker or consumer to actually deduce the computation. For our example, imagine in our example, we guess the post-promotional duration is 13.5 months, (12 months + 1.5 months free).<\/p>\n\n\n\n
Next, the net effective multiplied by the post-promotional duration should equal the gross rent times the pre-promotional duration. In our example, $3106 is the net effective rent. What is $3106 times 13.5? It is $41,931 over a 13.5-month lease. Quite a chunk of change! <\/p>\n\n\n\n
How about the gross rent? It should be the amount you pay for the lease, but divided by the pre-promotional duration. So here, it is 41931 divided by 12, which equals $3,494.25. Uh oh, that doesn’t quite work. It seems the landlord is being a little less generous than we thought (same net effective, but rent will rise sooner and with a larger jump).<\/p>\n\n\n\n
Pre-Promotional and Post-Promotional Duration<\/h3>\n\n\n\n
As we saw in the UDR example above, the net effective was quoted at $3106, the gross quoted at $3549.38, and the number of months free at 1.5 months. We saw that assuming the most common case of 12 pre-promo months was incorrect, as the numbers did not check out. <\/p>\n\n\n\n
The second most common way of quoting is using a 12 month post-promotional duration. That means the pre-promo duration is 10.5 months, leading us to the following equiation.<\/p>\n\n\n\n
$3106 * 12 = $37,272<\/p>\n\n\n\n
Now to get the gross rent, we divide $37,272 by 10.5 months (pre-promo). <\/p>\n\n\n\n
$37,272 \/ 10.5 = $3549.71<\/p>\n\n\n\n
Indeed, this time the numbers check out, and it means you only enjoy the net effective for 12 months before facing a potentially sharp rise to the gross rent at the one-year mark. <\/p>\n\n\n\n
Knowing this math also reveals the landlord was rounding just a little bit. The actual gross they quote is $3549.38, a rather strange number. Once you know the pre and post-promotional durations, it is very easy to convert between gross and net effective. Here it is:<\/p>\n\n\n\n
Gross Rent * (Pre-Promo Duration \/ Post-Promo Duration) = Net Effective<\/p>\n\n\n\n
$3549.38 * (10.5 \/ 12.0) = $3105.7075<\/p>\n\n\n\n
Turns out they rounded slightly to $3106 net effective. Should you ask for the 29 cents back per month?<\/p>\n\n\n\n