What is Net-Effective Rent on New York Rental Listings?
You might have noticed a phenomenon in the NYC rental market, where a lower rent asking price is posted in the ad but when you speak to the agent or landlord, they tell you the actual monthly is much higher.
It may sound like a bait and switch, but it's actually not illegal, although the ad should clearly state that the advertised rent is the "net-effective rent".
What does this mean and does it mean you're getting swindled?
Let's look at what this exactly entails as it's an ever-increasingly popular method for landlords to get people through the door and to sign on the dotted line.
What is Net-Effective Rent?
- Net-effective rent is an increasingly popular way of advertising a listing in New York City and includes free rent.
- Net-effective rent takes free rent whether its a few weeks' worth, a month's or even 4 months' worth and totals them with the remaining paid months of rent in the lease term, divided by the complete number of months in the lease term.
- Landlords offer free months with higher gross rent in many cases, because they need to report a minimum rent roll to their lender per month.
- While you might be paying higher rent in your paid months, across the life of the lease, you are actually paying the lower advertised rent.
- Always make sure you know the details of your lease terms, when the free rent will be applied, and how much you'll need to put upfront.
Net-effective rent is a calculation of monthly rent, with free rent figured in.
This means if a landlord is offering one month’s worth of free rent and you calculated that into the total rent for the year, the net-effective rent would be on average what you would pay.
For example, if the gross rent is $2,000 a month and you were being offered one month of free rent for a 13-month lease, your monthly rent would average out to be $1,846.15.
$2,000 x 12 (months) = $24,000
$24,000 / 13 (months) = $1,846.15
A real estate agent or management company might list the price as $1,845 or $1,846.
Net Rent Incentivizes Renters and Helps Landlords Fill Empty Units
This is a very common practice of marketing a rental apartment in New York City, and increasingly so.
Each year this practice seems to climb. Even more so during the Covid pandemic, with many residents fleeing the city, units have remained empty and far longer on the market.
Desperate landlords have not just decided to slash rent for current tenants, but are offering up to four months free on a lease!
The Net Effective Rent Can Be a Huge Difference from the Actual Rent
In our example above, the net effective rent is only a $24 difference per month. You might think that that doesn’t sound so bad.
However, the net amount can sometimes be hundreds off depending on the concessions that are given and the lease term.
This can happen when two months of free are being offered. The difference is also starker in contrast, the higher the gross rent.
Say the gross rent per month is $5,500. If you are given one month free on a 14-month lease, your net effective is $5,107. That’s nearly a $400 difference.
This means the actual rent can be dramatically more than what you had originally budgeted for.
It could mean that you won’t be able to rent the apartment after all, which is disappointing.
You Are Actually Paying the Net Rent in the Long Run
Watch what happens when you offer 1.5 months free on an 18-month lease--the rent goes all the way down from $5,500 to $5,040. The rent is driven down further.
Nonetheless, if you don’t mind paying more per month, you will end up paying the equivalent of the net rent by the end of the lease.
It just requires saving money during the free month or months and budgeting wisely during the rest of the lease term.
Put aside what you might have spent had you been paying the net rent into a saving account that you can draw from when you start paying your gross rent.
Why Doesn’t the Landlord Just Offer Me the Lower Rent Per Month?
A landlord might be willing to offer you the net effective rent or the reduced sum amortized over the course of your lease.
Landlords Have Financial Obligations
However, sometimes the landlord or entity that owns the property may need to collect the gross amount for accounting reasons.
Many landlords and developers take out large loans and financing to purchase and develop their properties.
Often this reason might come from financial obligations to investors or to banks, based on the amount of money they need in revenue.
Lenders often require that they report and keep a minimum rent roll, so it's important for landlords to report these high rents, even if there are a few give away months.
Posting Net-Effective Rent is a Good Way to Draw Interest
Advertising the net-effective rent also, of course, allows the agent or the landlord to market the apartment for a lower price, attracting more interest.
This may make many feel as though the advertising is misleading.
However, as long as the ad contains a disclaimer that the pricing is promotional, there is nothing really unethical about this practice.
Even if you don’t find out what the true rent is until after you see the apartment, the agent or landlord is in no way obligated to offer you the apartment for the lower price.
In some rare instances, a landlord may agree to the net-effective price.
What to Expect from the Rental Process
Knowing and understanding the rental process in New York will definitely give you a leg up and help you navigate the confusing waters of net-effective terms.
First, find out what your credit score is. Without knowing if you have decent credit or not, you are walking into a rental situation blind.
The brokerage or management will run your credit once you fill out an application, which usually comes with a fee attached.
Many landlords these days use third-party services like On-Site, which directly require the renter to put in their personal identifiers, pay the fee directly to the third-party and run a credit report which gets sent to the landlord.
Hopefully, you are creditworthy of the apartment you want. If not, read up on how you can improve your credit score.
Next, you will be asked to submit a whole slew of documentation proving you are income-worthy.
This will usually include previous tax returns, bank statements, pay stubs from your employer, a letter from your employer stating your position, salary, and period of employment.
Some landlords might even ask for personal reference letters or a reference letter from your current landlord.
The more you can show, the better.
To learn about this process more in-depth, we have an article on the in-and-outs of applying for a New York City rental apartment.
Read the Fine Print
In the event that you are offered the net rent per month, make sure you know what the lease terms are exactly.
Most standard leases are 12 months long. Despite this, with net effective rent often you might see more irregular lease terms such as 13 months, 14 months, etc.
Take note that those offering you a rent-stabilized lease cannot legally require terms that are not in 12 or 24-month increments.
Make sure you know exactly when your lease expires and when the net effective period also expires.
If you are taking a free month or two instead, make sure you know exactly when that free rent applies.
Some landlords or management companies might give you the first or second month free, but many other times, the free rent only applies to the end of the lease.
You May Still Need to Put a Lot Upfront
Other details to watch out for are what monies will be required upfront at lease signing.
Some management companies might be willing to forgo the first month’s rent in light of the free rent and only require the security deposit.
However, many others might still require both the second month’s rent and security deposit.
If any of the details are a problem for you, you can potentially negotiate with the landlord on these terms.
If you are getting a free month at the end of your lease, you could ask if it can apply at the beginning and vice versa.
Perhaps you can even ask to split the free rent in half, two weeks applied to the beginning and the last two at the end of the term.
Get creative to find a solution that both parties can agree to.
Just beware that while paying net-effective rent can be a treat, once you are offered a lease renewal you probably won’t be offered the same deal and might not be able to afford the apartment thereafter.
So take this into account along with the other potential costs of moving like putting up a security deposit, brokers fees, and moving fees.
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