We've all seen the ads: Rent a unit in our building and you'll get access to amazing common areas! Dog spas! Bike storage!
Real estate companies and landlords will toss in freebies until the cows come home to ensure you sign a lease. However, nothing lures prospective renters in as much as the appearance of a serious dent in their rent. But "appears" is the key word here. By using a marketing tool called "net effective rent," landlords and real estate companies attempt to entice prospective tenants with deceptively low rent by offering one-time concessions—most commonly, one or two months of free rent in exchange for your signing a lease.
"The formula is relatively easy," says real estate attorney Felicia B. Watson. "The pitfall is that the tenant gets to forego paying one (or more) month's rent, however they pay all the other months at the higher amount. A tenant needs to budget for the gross rental payment."
How to Calculate Net Effective Rent
Here's the simple formula for Net Effective Rent: It is the annual cost of rent minus the concessions divided by the number of months of the lease.
It sounds more confusing than it is. Check this out...
Normal monthly rent: $2,400
Landlord concession: 1 month free
Rent paid over the 12-month lease:
$2,400 x 11 months = $26,400
Net effective rent:
$26,400 ÷ 12 months = $2,200
The thing is, that landlord can advertise this ($2,400) apartment as a $2,200 apartment—it's the net effective rent.
So while the advertised lower price of $2,200 may look attractive and fit nicely into your budget, you have to consider that after your one month of free rent runs out, you're stuck paying all the other months at the higher number.
Some landlords may make your net effective rent the rent due each month — so you're essentially spreading out your free month of rent across the entire lease — but in either case, there is one serious pitfall:
Beware at Lease Renewal Time
Landlords are known to raise rent year after year. As a tenant, you need to know that when your lease comes up for renewal, the new rent increase amount will be based off the full gross lease, not the net effective amount. So if the net effective rent was a stretch for your budget, you might not plan to stay for longer than your lease.
The desirability of the unit and its surrounding area will always affect how high the price tag goes. But there's a golden rule to keep in mind as a prospective tenant: Unless you plan on moving out after just one year, it's the less expensive gross lease that benefits your wallet the most.