What is Net Effective Rent?
The Net Effective Rent is the actual rental cost paid by a renter, factoring in deductions related to concessions and promotions.
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How to Calculate Net Effective Rent
The net effective rent is the amount that a renter pays on a monthly basis for the lease of a rental property, such as a residential building or commercial building (CRE).
To generate interest from prospective renters and increase their occupancy rates – i.e. reduce vacancies – landlords often offer concessions or promotions as an added incentive.
While the net effective rent can be presented on a per-month basis, it is standard for real estate owners and investors to annualize the metric as part of their revenue build.
The process of annualization refers to projecting the actual amount of rental income expected to be received from tenants across the term of their leases
Furthermore, most real estate developers and investors own hundreds (or thousands) of units within their portfolios and receive rental payments from all these tenants.
In a portfolio, the discounts related to concessions and other promotional offers are spread across the entire lease term (and the various tenants).
Net Effective Rent Formula
The formula for calculating the net effective rent on a monthly basis is as follows.
To reiterate, the metric is standard for the metric to be annualized for purposes of real estate modeling.
The most practical formula for real estate modeling – in which there is more than one rental unit – is shown below.
The annual net effect rent is calculated by taking the monthly net effective rent and multiplying it by the number of units, which is then annualized by multiplying the amount by 12.