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Net Effective Rent vs. Gross Rent: What You Need to Know Before Renting an Apartment

January 11, 2021
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If you are searching for an apartment in NYC or Boston for the first time, there are a lot of things that you need to consider before taking the leap and signing on the dotted line. You consider factors such as the location of the apartment, the proximity to your work, walk-up or high-rise building, and the nearby amenities. However, one of the most important things that you will consider is the monthly rent.

So, you go and check out NYC or Boston apartment listings. After a while, you find a junior one-bedroom that seems to be in your price range! It’s in a great location and close to the subway. You ring up the owner and ask for a viewing. You show up, check the apartment, and now you’re ready to lock in that rent contract.

Suddenly, there’s a problem: the owner tells you that the monthly rent is different from what is listed on the ad.

You’ve just had your first experience with gross rent versus net effective rent. It’s a common practice in NYC and Boston, but it can be confusing and costly for renters who don’t understand how this practice works. What’s more, it’s not always possible to get out of a contract once you’ve signed on.

Is listing a different rent price on an ad legal? How do you know the actual monthly rent that you will be paying? This article will help guide you through the ins and outs of rent prices.

Gross Rent

In a nutshell, the gross rent is the flat monthly amount that you will pay during a lease period. This can also include all the associated costs of renting the apartment, such as the utilities, building dues, and maintenance fees, but this is not always the case.

When renting an apartment, your financial qualifications are calculated based on gross rent. In NYC, for example, the financial qualification is 40x gross rent as your annual household income. In Boston, it's 3x gross rent as monthly income salary. So, if you're looking to rent an apartment in NYC with a $3000 monthly gross rent, your annual household income should be at least $120,000.

What is Net Effective Rent

Net effective rent refers to the amount minus the discounts that have been applied.

How is Net Effective Rent Calculated?

Net effective rent is calculated by multiplying gross rent by the length of the lease minus the discounted months you're given by the property owner. Then, you divide the amount by the length of the lease. Finally, you subtract the calculated amount from the gross rent to get your net effective rent.

Okay, that can be a little confusing, so here's a handy little infographic to make things easier:

Net Effective Rent Formula

In the infographic, your gross rent is $3000 per month, your lease length is 12 months, and you are given 2 months free rent by the property owner. Thus, you multiply $3000 by 10 (the number of months not discounted), then divide the amount by 12 (the length of the lease).

This makes your net effective rent $2500 per month.

Sometimes, the property owner will simply not collect rent for those months. This means that you will be paying $3000 for 10 months, and have two months where you will not send any money to the property owner. Either way, you will be discounted a total of $6000 during the duration of your lease.

Always read your lease terms thoroughly to understand the terms of your gross and net rent, as well as any discounts that the property owner will give you.

Why Do Agents Use Net Effective Rent?

Owners typically discount on rent as a way to incentivize renters to finalize a rental agreement. Since gross rent is higher than net effective rent, the renters will jump at the chance to get a better deal on the apartment.

Another reason why agents advertise net effective rent is that the cheaper price appears more frequently on search engine results. Renters will usually try to find the best deals, and using net-effective rent prices will help bump up the listing in searches.

How does Alpaca deal with Net Effective Rent?

It can be quite confusing to understand how net effective rent works, especially if you’ve never tried to calculate it before. Don’t worry though, we’ve got our great chatbot Alex to help you through it! Often the incentives and net rent are only mentioned somewhere in the description. Alex the Alpacabot uses machine learning and NLP to extract this information and help break down complicated rental agreements so that you can easily see both net rent and gross rent, as well as any discounts you’ll get.

Our system always displays gross rent so that you’ll know exactly how much you need to pay every month.

Alpaca listing Sample

Alex also has the amazing “Alpaca Insights”, where you will see other great information such as net rent based on incentives, any broker fees, and even a breakdown of rent that will calculate how much you’ll spend if you stay for more than the typical 12-month lease.

Alpaca Insights

For long-term renters, Alpaca Insights also offers a breakdown of what your lease will look like after the terms of your first lease is over. Remember, broker's fees and incentives don't usually apply after the first year, so your rent will likely revert back to the original terms without the discount. With the Price Breakdown feature, you'll be able to see the difference between the first year of your lease versus the succeeding years.

Finally, there are two more pieces of information you’ll get from Alpaca Insights. First, you’ll get information about median rent for similar apartments so that you can see if you’re getting a good deal on your apartment. You’ll also see how long the apartment has been on the market so that you’ll know if you need to act quickly on it.

Tips When Determining Your Rent

While it sounds straightforward, it can be confusing when the owner of the apartment does not provide you with a lot of information. Here are some tips to keep in mind when determining the final cost of your monthly rent.

Clarify the Type of Rent

Some owners and real estate agents will advertise their property based on gross rent, while others will use net effective rent. Don’t immediately jump into a contract without clarifying what type of rent you will be paying! Before you sign anything, ask to see the rental agreement to know whether you will be paying the gross amount or the net amount.

Familiarize Yourself with Renewal Terms

If you’re lucky enough to find an apartment that you really like and you think that you’re going to renew after a year, it’s important to know your gross rent since most promotions will only be applied during the period of your first contract. This means that, after your original lease is completed, you’ll likely be paying the gross rent instead of the net rent.

Of course, depending on your rental agreement, the owner, and your status as a tenant, the owner might be willing to re-apply the same terms or give you a small discount. However, you should not expect that the net rent will automatically be applied when you renew your contract.

The Bottomline

Understanding how gross rent and net rent works is vital if you want to keep track of your monthly expenses. It can be confusing to pay rent if you are not aware of the difference, and it can be costly -- not knowing how much you need to set aside each month can ruin your budget quickly!

Chat with Alex Today!

If you find it a bit confusing to understand net-effective rent, don’t worry because we’ve got you covered! Our great chatbot Alex will help you understand net-effective rent AND find the best apartments in your budget range.