What is Net Effective Rent and How To Calculate It?

Author Casaldra Andreassen Read bio
Tags: net effective rent
Date: September 6, 2021

So, you’ve probably planned on moving sometimes, and in that case, you have probably noticed that a lot of buildings are offering 2 or 3 months free. Now, there are a few things you need to understand before making the move.

If you didn’t have time to do the research, the first thing you need to get acquainted with is the difference between net effective rent and the amount you would be paying each month.

Let’s see how it goes when you experience paying the net effective rent every month, instead of taking the free months?

What Is Net Effective Rent?

Imagine you’re cruising the internet, looking at rental listings for around $2,300, which is close to the top of your budget

You click on an apartment you love, but it’s asking $2,377,  just slightly over the amount you were planning on giving. But hey – the listing description mentions something about net effective rent, on a 13-month lease

What does net effective rent mean?

Also – what’s the deal with a 13-month lease?

Essentially, the net effective rent is the total gross rent for the entire term of a lease divided by every month (free months and other promotions included). 

Net-effective rent figures arise from rent concessions, such as one or two free months on a lease. It is a way to attract tenants to a listing – but they can also be one of the rental “gotchas”.

Three large office buildings

Simpler Pricing on Rentals With Concessions

It’s okay, I get it, landlord concessions and net-effective rents can be confusing. That’s why in IPG you get transparent prices for any rental, whether the unit includes any concessions, such as one or two months free on a given lease term.

The listing will also determine the gross rent, aka the “real” rent, along with the net effective rent calculated based on the specific concession.

This way, a client knows whether some offer applies to him, and what that offer means for how much he’s likely to pay.

Addressing The “Free Rent” Moves

In general, most buildings use to spread out the promotional “free rents” voice, over the entirety of the lease. But, this can lead to an unintended problem:

People would then complain that their rents were raised by “unconscionable” amounts when it came time to renew.

That being said, if your rent per month is 5K, and you are getting three free months when signing a 12-month lease – your effective rent is actually 4K.

But, when the time for renewal comes, any potential increases based on the 5K amount can be a reason for tenants to complain vociferously. 

This imposes the conclusion that some buildings are simply finding it easier to let someone live out their free months while retaining the regular rent on the paid months. 

On the other hand, for developers who actively rely on investors for new projects, this “per month revenue” (calculated by signed lease rates, not the effective rents) is a key metric. 

These cases can most certainly be applied to any building that is prone to changing rent charges and relies on free promotional months at the beginning, or the end, of the lease, but sometimes it depends on the building or the leasing company.

Stopping Huge Concessions?

The other issue with net-effective rents is that the concessions that create them usually only last for your first lease

If you renew your lease on the apartment/industrial building/warehouse without another concession, you’ll be paying the higher monthly rate forever, and your total annual spending on rent will exponentially go up. 

If you’re not on alert or working with a trustful agent, you can find yourself paying significantly more than you may have expected.

Most companies will give you the free months but not allow you to pay the lower amount spread out. That’s all due to the lease renewal time. 

They want to bounce the renewal amount off the larger number. I bet most buildings will be stopping the huge incentives soon since the rental market is HOT again.

Aerial view of San Francisco

Net Effective Rent Calculator

Net-effective rent is calculated by dividing the total cost of a lease with a concession across all the months of the lease, even if one or two of those were free.

Let’s get into the maths of this…

Say the unit you like offers a net-effective rent of $2,377 per month, on a 13-month lease – with one-month free rent.

The cost of the full lease would be:

$2,377 per month X 13 months = $30,901

Basically, the “net-effective” rate distributes the discount from one free month of rent across all the other non-free months of a lease

Again, the total lease amount is accurate, but with one of those months free, the rent bill for every other month will actually be higher than the net effective rate.

Read every lease closely to understand what the actual monthly rent payment is and when any rent concessions end. If you are a good tenant you can negotiate a deal with your landlord, because after all, they will also need a tenant, risking an empty apartment and no income for a month or two.