Lease term
yrs
mos
Monthly rent
$/
mo
Discounts for tenants
No. of rent-free months
Tenant cash allowance
$
Additional landlord expenses
Operating costs
$/
mo
Operating costs
%
Net effective rent (monthly)
Net effective rent
$/
mo
Net effective rent (annual)
Net effective rent
$/
yr

If you're scratching your head while figuring out the profit from renting out an apartment, you should give this net effective rent calculator a try. With just a few clicks, you will be able to determine how much you'll actually keep in your pocket. Keep reading to discover the net effective rent formula and learn to tell the difference between gross rent and net rent.

This calculator is useful for rental only. If, on the other hand, you're interested in buying or selling a property, check our our mortgage calculator or cap rate calculator respectively.

Gross rent vs net rent

So, what is the net effective rent, or NER? You can define it as the total sum of money that you, receive on an annual basis from a particular property. It is calculated from the landlord's perspective, meaning that you, as the landlord, will be interested in maximizing this value.

As opposed to regular rent, the net effective rent takes into consideration multiple factors, such as the lease term or various negative cash flows. For example, if your tenant receives one month of rental free of charge, your NER will drop. This comprehensive approach makes NER a perfect metric to accurately compare rental leases with various values and durations.

A very similar metric, the net effective rate, is calculated according to the same principles, but per square foot (or square meter) of your property.

Our net effective rent calculator includes the following factors (apart from the base rent) in the calculations:

  • Number of rent-free months. As a landlord, you can find it profitable to give your tenants a few months free of rent - for example, the first three months of a three-year-long contract.
  • Tenant cash allowance. It is a one-time reimbursement for the construction expenses covered by the tenant - for instance, the build-out costs of partition walls, electrical outlets, doors, etc.
  • Operating costs. Not all of the money you receive from the tenant will end up in your pocket. You need to spend some of it on maintenance. These costs cover expenses such as security, cleaning, or repairs.

NER is often calculated as to take into account the present value of money. For simplicity, our net effective rent calculator doesn't include the effect of time; if you wish to analyze your cash flows in more detail, head straight to the Net Present Value calculator!

Net effective rent formula

Now that you know what NER is, it's time to learn how to calculate the effective rent. You can use the formula below:

NER = [BR * (Term - N) - TA - OC * Term] * 12 / Term

where:

  • BR stands for base rent per month;
  • Term is the lease term in months;
  • N is the number of rent-free months in the contract;
  • TA is the tenant cash allowance (in total);
  • OC are the operational costs per month. Alternatively, you can express them as a percentage of monthly rent, and our net effective rent calculator will automatically determine this value.

Alternatively, you can open the advanced mode to enter base rent and tenant cash allowance per square meter or per square foot.

How to calculate effective rent: an example

If you're still unsure how to use the net effective rent formula, don't worry! In the next paragraphs, we will provide you with a cheat sheet that will make calculating NER a breeze.

  1. Decide on a property you want to rent.

  2. Choose the lease term (the duration of the contract) and the base rent per month. For instance, we can assume that you want to rent an office space for two years, for $3200 per month.

  3. Decide on the discounts you want to give your tenants. For example, you can offer one month free of rent and a $4000 cash allowance.

  4. In the last step, estimate your future operational costs. We can assume that they are equal to 8% of rent, i.e. 8% * $3200 = $256 per month.

  5. Input all of these values into the net effective rent formula:

NER = [BR * (Term - N) - TA - OC * Term] * 12 / Term

NER = [3200 * (24 - 1) - 4000 - 256 * 24] * 12 / 24

NER = [73600 - 4000 - 6144] / 2

NER = 63456 / 2

NER = $31728 per year = $2644 per month

  1. In the advanced mode, you can also divide the NER by the property area to obtain the net effective rate per m². Let's assume the area is equal to 80 m²:

$31728 / 80 m² = 396.60 $/m² per year

$2644 / 80 m² = 33.05 $/m² per month

As you can see, the net effective rate on this property is equal to 33.05 $/m², while the base rate was 40 $/m². That's quite a difference!

Once you've calculated the net effective rent, you can use it in the debt service coverage ratio calculator, too.

Acknowledgements

We created this calculator basing on a suggestion from René Guemps. Thank you!

Bogna Haponiuk

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