You may have seen the term “net effective rent” floating around in rental listings and wondered, “is this a marketing tactic?”. The answer is simply yes, but it can work in your favor. I’ll explain exactly what "net effective rent" is, how it’s calculated, and whether or not it’s for you.
Objectively, net effective rent is a concession used to entice a renter to sign a 1-2-year lease agreement with the apartment unit by offering 1-3 months free. The reason being property owners don’t like vacant apartments, so they prefer having a tenant stay as long as possible, and a lease agreement ensures this.
You’ll sometimes find the net effective rent displayed clearly on the listing as the rent amount. Sometimes you’ll find the gross rent displayed instead while the net effective rent is nestled in the description, so always read rental listings carefully.
The math on finding the net effective rent may be intimidating at first glance, but it's actually pretty simple. I’ll do my best to break it down.
You’ll need to know three things:
Gross rent amount
Rental concession being offered (ex. 1-3-months free)
Lease term (in months)
Below is an example of a rental listing with a gross rent of $2,600, offering a 1-year (12-month) lease with a rental concession of one-month free.
$2,600 FOR RENT
123 Luxury Street, Penthouse Unit
Live in this beautifully renovated 1 bedroom luxury apartment with walk-in closets, oak wood flooring, energy-saving stainless steel appliances, and a bright, spacious living room perfect for hosting.
Net effective rent: $2,383 with one month free on a 12-month lease
First, you multiply the gross rent by the number of months you’re paying for:
$2,600 x 11 = $28,600
Then divide the total by the number of months of the lease term to find the net effective rent:
$28,600 ÷ 12 = $2,383.33 (or $2,383)
Net effective rent: $2,383 per month
Total: $26,213
If you were to pay the gross rent instead, with no rental concession, the total rent during your 12-month tenancy would be $31,200. With the rental concession you save $4,987. So – you see – if done right, you could save a lot of money from signing a lease and paying the net effective rent each month.
However, make sure your last month is actually free. Otherwise you’re still just paying the regular gross rent disguised as a net effective rent.
The math gets a bit trickier when concessions are more than one-month free. You’ll even see cases with “half-a-month free”. In the latter case, it’s especially crucial to do the math correctly.
This “marketing tactic” is beneficial for those who know for certain they only plan to stay within the time frame of the lease. If you find yourself wanting to stay longer, the net effective rent may no longer apply and you will need to pay the gross rent. However, the silver lining is you can prepare for this rent increase by saving throughout your tenancy.
Rental listings can get pretty creative with the net effective rent so if you come across a listing that confuses you, reach out and I’ll help you figure out whether you’re getting the deal you expect.