What is Net Effective Rent?
You’re browsing the Internet for New York City apartments and an ad grabs your attention. You enthusiastically look over the details of the real estate listing and somewhere in the description you see the term “net effective rent”. If it’s your first time searching for NYC apartments, you might be wondering what that means.
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Net effective rent, in a nutshell, is the average monthly rent that you need to pay for the entire lease duration, which factors in the concessions, incentives or freebies that a landlord throws in. To calculate, simply divide the total rent amount due for the entire lease term by the number of months indicated in the lease contract.
“Net Effective Rent” Term as an Advertising Tool
Landlords and real estate agents commonly use the term “net effective rent” in their apartment ads. They use the term to attract more attention to their ads and increase foot traffic to the unit. The “Net effective rent” term allows them to advertise a lower monthly price than they would otherwise be able to do.
Using “net effective rent” is supposed to help ‘normalize’ the monthly rent. This way you can compare apartments that have concessions and incentives with apartments that do not. Some people do find this way of advertising a little misleading.
How Net Effective Rent Works: An Example
Landlords will usually throw in incentives if you sign a lease that’s longer than 12 months.
Let’s say that Apartment A with no incentives is listed for $3,000 per month on a 12 month lease. Obviously, your monthly rent due will be $3,000.
Let’s say Apartment B is also advertised for $3,000, but this one calls the $3000, the “net effective rent”. The ad says that this landlord will offer two months free.
What does this mean?
Upon closer inspection, you realize that the actual monthly rent you have to send a check for each month on Apartment B is $3,500, but the landlord is offering two months free month at the end of the lease term if you sign a 14 month lease. Therefore, the 13th and 14th months are free.
The total amount you would pay on this lease would be $3500* 12 = $42,000 since months 13 and 14 are free. So, $42,000 divided by the 14 month term equals $3,000. While $3500 is the actual rent, $3000 is considered the “net effective rent”.
Downsides to Net Effective Rent
If you chose Apartment B in the example above, one thing you should take into consideration is that you will still need to pay the amount of $3,500 (not $3000) for each of the first 12 months. The net effective rate posted on the ad is only there to facilitate comparison among other apartments which may not have the same incentives. Note that if on a “cash” basis your budget is a strict $3,000 every month, paying the extra $500 per month may be a real problem.
Also note that rental fees are known to increase over time and a net effective rent deal can be a bummer when you renew your lease. Why? Most landlords will base the increase on the gross rent (a higher amount) instead of the net effective rent (a lower amount).
By understanding how net effective rent works, you will be able to make smart choices when looking for an apartment in New York. Frele has thousands of apartments for rent. You can do a search (for free) by going to frele.com.
For more NYC rental tips, please go to frele.com/learn.
This article was written by:
Phil Horigan, NYC Real Estate Veteran
Founder, Frēlē, the free and honest NYC rental marketplace
Producer, Phil’s NYC Rental Tips [YouTube Channel]
Blogger: flowfreely.com
Instagram: @philiphorigan
Phil has been a licensed NYC real estate agent since 2004 working for some of the top real estate brokerage firms in the industry. He founded Leasebreak.com in 2013, and Frēlē in 2017. Frēlē and Leasebreak are free and transparent rental marketplaces to search for or post apartments for rent in NYC
Go to frele.com to search for NYC apartments (free service).