When you are searching for a new apartment to rent, there are many things you will consider before signing the lease. Location, amenities, the building’s age, and additional factors help us decide whether to rent an apartment or keep searching for another.
However, most renters will first determine their budget and care about the rental price of the apartment. Prices vary greatly between boroughs, neighborhoods, and individual units. When looking for apartments online, renters can easily filter units by their rent. Some landlords and agents will advertise the gross rent, and some will advertise the net effective rent. These rent amounts vary, and it’s important to understand the differences to know how much you will pay each month.
What is Gross Rent vs Net Effective Rent?
When looking at apartment listings, renters can come across two kinds of rent: the gross rent and the net effective rent. Advertisers can use either on their apartment listings, so renters need to understand the differences between the two.
What Does Gross Rent Mean?
Gross rent is rather straightforward and commonly used for online rental advertisements. The gross rent is the total amount that the tenant will pay each month. It is the amount they will see on their lease and can expect to send from their bank account at each payment cycle. The gross rent typically ends in an easily divisible number, such as $3,500 or $10,250.
What is Net Effective Rent?
The net effective rent reflects the rent cost after the landlord’s concessions, divided by the lease term. This is more common in a slower rental market where owners try to incentivize prospective tenants to sign leases. If a landlord offers free months of rent or a reduced rent for several months, they will then have a gross rent and a net effective rent.
Since the net effective rent reflects the total cost after concessions, it is lower than the gross rate. Therefore, some advertisers will use this number to entice renters. However, renters should still expect to pay the cost of the gross rent each month. If a landlord offers a free month of rent, this will likely be a month where the tenant does not pay any rent, but they will still pay the gross rent for the remaining months. In some cases, tenants can negotiate with their landlord to pay the net effective rate across the entire lease term instead of receiving the free month.
Do I Need to Know Both Rents?
The gross rent on an apartment is higher than the net effective rent, as it doesn’t consider any special deals or promotions. When an advertisement leads with the net effective rent, you can look in the description for more details about the concession. This should state whether the unit offers free months of rent, reduced rent for one month, or another discount. At the very least, the advertisement will disclose that it is advertising the concession.
From here, renters can calculate the gross rent independently or reach out to the advertiser to directly ask for the gross rent. In a fast-paced market, it may be easier for renters to complete this calculation independently and save time from inquiring about something out of their budget.
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.
Consider the Gross Rent for Renewals
While it’s important to know the gross rent for the immediate purposes of the current lease, renters should also consider how the gross rent will impact their budget if they resign the lease. When the landlord renegotiates the lease, they will either maintain the gross rent or increase it based on the gross rent price. Additionally, the landlord likely will not offer any concessions in the next lease cycle.
Therefore, renters could face a jump in their rental costs if they look at the total yearly rent. While renters cannot pay a full year’s worth of rent upfront in New York City, some renters may still budget for an entire year and then put that money into a special account specifically for rent purposes. The increase from the net effective to the higher gross rent after the first year can feel incredibly steep.
Real Estate Professionals
It’s incredibly important for licensed real estate agents to know the difference between net effective and gross rent and to learn how to calculate the two. Many professionals receive documents with listings from property owners, and the documents may only include the net effective rent and the concession without disclosing the gross rent. Therefore, agents must calculate the gross rent so they can relay all of the details to the tenant.
Additionally, real estate agents should know how to advertise the net effective rent. On RentHop, agents can use the net effective rate for their rent, but they must disclose that it’s the net effective rate in their description. Including the concession is also helpful so a renter can calculate the gross rent and save a step during the inquiry process.
How to Calculate
Renters and real estate agents may need to calculate the gross rent from the net effective rent at some point. Luckily, calculating the gross rent involves a simple calculation, where you only need to know the net effective rent, the duration of the lease, and the number of free months.
Gross Rent Formula
When you know the net effective rent and the duration of the lease, you can calculate the monthly gross using the following formula:
Gross = (Net Effective Rent x (Lease Duration + Free Month)) / Lease Duration w/o Free Month
For example, if you see a listing with a net effective rate of $3,200 that offers one month free on a twelve-month lease, you can complete the following calculation to determine the gross:
- Gross Rent = $3,200 x (11 months + 1 free month) / 11 Months
- Gross Rent = $3,200 x (12 months) / 11 Months
- Gross Rent = $38,400 / 11 Months
- Gross Rent = $3,490.91/month
Using the above formula, we see that a listing with a rent of $3,200 and a free month actually means that the renter is on the hook for $3,490.91 each month. Depending on the renter’s budget, they may no longer be able to afford the apartment if they need to pay that amount monthly. Additionally, this can affect the income requirement, where the renter now needs to make 40x the gross rent in a year. Calculating the gross rent is important for budgeting, and for ensuring you can still qualify for the unit.
Net Effective Formula
In some scenarios, agents may have the gross with a concession and may want to advertise the net effective rent. They can use this formula to determine the net effective rate:
Net Effective Rent = Gross x Lease Duration w/o Free Month / (Lease Duration + Free Month)
In this example, $3,200 will be the gross rent. What will the net effective rate be for a twelve-month lease with one month free?
- Net Effective Rent = $3,200 x 11 months / 12 months
- Net Effective Rent = $3,200 x 11 months / 12 months
- Net Effective Rent = $38,400 / 12 months
- Net Effective Rent = $2,933.33/month
Rent Calculators
For those who do not have the enthusiasm to calculate the net effective rent on their own, there are numerous online calculators that will do the job quickly. Simply search for a “net effective rent calculator” on your preferred search engine and then input the appropriate fields. This can help you instantly determine the rent when you need to inquire about apartments quickly.
Conclusion
Gross rent and net effective rent are popular terms in residential rental real estate markets. Both renters and real estate professionals should familiarize themselves with the difference between each type of rent. While it’s simple to solve for each type, there are also free online tools to complete the calculations. Furthermore, renters should remember that when they get a concession with their rental, they may set themselves up for a significant price hike in future years.
