What Is Net Effective Rent?
Commercial Real Estate

What Is Net Effective Rent?

Published At: Fri, 09/10/2021 - 01:49

If you are renting or leasing a property, or are at least active in the real estate industry, one of the terms you will encounter is “net effective rent.” The net effective rent is the amount of money a lessee pays on average over a set lease period. 


There are times when it serves as an attention-grabbing element in advertisements, depicting a monthly amount that is lower than what you will actually pay. This approach can be effective for lessors who wish to encourage more people to view the available property for lease. 


However, it can sometimes cause harm to lessees who do not understand what the term means and how it differs from the actual amount they're paying each month. Below are a few points you need to understand about net effective rent to avoid falling into that trap.


What Is Effective Rent?

Effective rent is the amount of money a tenant pays for rental property itself, excluding any utilities, taxes, or other expenses. It allows a tenant to understand what they are paying and gives them flexibility in how much space they are renting. It also helps them separate costs like utilities that may not be included in their lease agreement.


How Does Net Effective Rent Work?

Usually, a lease contract is a minimum of 12 months. A common practice for some lessors, partly to attract potential lessees, is to add in a free month in the agreement, which can be either the first or the last month.


For example, John Smith has put up a property for lease, and the gross lease amount for a one-year contract is $1,000 a month. Instead of advertising it as a $1,000 monthly property, John could add in the promotion and lower the price by advertising the net effective rent instead.


Suppose John decides to make the first month of the contract free for the lessee. This would make the number of payable months in the lease drop to only 11 months, resulting in a total payable rent of only $11,000 for the entire contract. Therefore, instead of John advertising that the property has a monthly price of $1,000 with one free month, he can provide a lower amount.


To calculate the net effective rate, simply follow this formula:

[Total rent payable] / [number of months in lease] = [net effective rent]

Thus, in John’s case:

[$11,000]/[12] = $916.67


John can now make a more attractive offer of $916.67 a month, which appeals more to buyers.


Gross Rent Versus Net Effective Rent

The main difference between gross rent and net effective rent is excluding free months on your lease period. 


Gross rent is the amount of money that a lessee pays to rent a space if they have not been given any free months on their lease period. Meanwhile, net effective rent is calculated by taking the gross monthly cost and deducting any discounts and all amounts paid into taxes, utilities, maintenance fees, or other required expenses.


To determine both of these values, you must speak with your lessor and read your lease in its entirety.


Why Do I Need To Know About Net Effective Rent?

It's important to know and learn about net effective rent to ensure you're not being charged more than what an advertisement states. 


Be wary of how some owners and managers use the net effective rate to appeal to you and lead you to other hidden charges. If you're not on the lookout for this term, it may be easy to fall into a lease period that costs much higher than what you were initially planning to have.


The worst thing you could do is learn about the actual amount of money you're supposed to pay monthly after having already signed the contract or the lease agreement.


Hence, you would need to combine your personal research with advice from industry professionals like My Perfect Workplace to find the best offer for your needs and avoid any fraudulent or exploitative offers along the way.


How Do You Ask For A Lower Rent Price?

Lessees often want to ask the lessor for a lower rent price. This is because they feel that the current rent is too high or does not fit their budget. A tenant may also want to talk about other issues such as repairs, noise levels, and utilities included in the cost of renting there. 


One way to ask for a lower rent price is to mention how a similar availability nearby is being offered at a better rate. For example, if there’s another rental space that you are considering in a building of the same class that is around the size and is in the same neighborhood, you may have leverage to ask for a better rate to fill that vacancy as opposed to the other. However, it’s also important to remember to not get too demanding about it.


What Credit Score Do You Need To Rent A Commercial Space for Lease In 2021?

A credit score of 710 or higher is generally needed for good rental qualification. However, despite a lower score, you can still try applying for a commercial lease. Landlords might be able to offer you a higher rate if your application shows them that you have other qualities that will make it worthwhile for them to rent to you, like good steady income and positive business projections.


Before You Go

The use of net effective rent is usually a way for property owners and managers to make a lease more attractive to potential tenants. Most of the time, it offers an excellent deal to lessees, but sometimes, it can also be a tactic to downplay prices and confuse clients.


With this in mind, always make sure that you have experts right behind you to guide you on your journey to finding a property regardless of whether you are looking to buy, sell, or lease. If you have any questions regarding real estate, send us a message, and we’ll be happy to assist you.


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