Effective rent
| Effective rent |
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| See also |
Effective rent – is the real rent distribution over the entire lease period to be achieved by the landlord after the value of the concession has been deducted from the base rate[1].
Calculating effective rent
Calculating such rent is very simple. At the beginning, it is necessary to plan escalations, rents and (during the lease period) costs of transferring the lease. Another important step is to properly plan outflows from the lease to get information on the annual rent number.
The net amount of rent should be used to calculate:
- average rent (it is not necessary, but it should be included in the financial statements)
- net rent (provides the value of the lease)
- effective rent (multiplies the net value with the current value of US$1)
The effect of the effective rent is the situation in which the rent for the net value is determined on the basis of the current annual value. Comparison of leases that have different forms is possible due to the effective calculation of rent[2].
Effective rent for Landlords and Renters
Effective rent for Renters means the actual rent after deducting the value of the concession from the value of the basic rental. Effective rent very often appears in apartment advertisements due to the fact that it is usually lower than the real rent. Before concessions, the potential tenant can pay a much higher rent value.
Effective rent for Landlords means calculating it (calculations apply for owners). The landlord offering concessions with a cash value (for example: exemption from the payment of one month's rent) loses money from the real rent. In order to determine the appropriate rent rate, landlords necessarily' need to calculate the cost of renovation, concessions and maintenance[3].
Comparison of Effective Rent, Gross Rent, Net Rent and Face Rent
Effective rent is the rent rate averaged over the rental period (including no-rent periods and concessions). The average amount of money that comes from the tenant every month or every year, when it is averaged over a certain period of time (very often it is the leasing period)[4].
Gross Rent is the rent calculated including all costs such as taxes, costs of living, insurance[5].
Net Rent is the amount of money that have been reduced by the expenses required for real estate services[6].
Face rent (asking rent) is the basic rent rate, which is given before incentives and rent increases, it may (but it is not necessary) include the costs, it depends on whether the rent is given in gross value or net value[7].
Footnotes
References
- Bien M. and others, (2011), Renting Out Your Property For Dummies, John Wiley & Sons, p. 55
- Kempf S., (2015), Development of Hedonic Office Rent Indices: Examples for German Metropolitan Areas, Springer, p. 100
- Lack J., (2015), For Rent By Owner: A Guide For Residential Rental Properties, Atlantic Publishing Company, p. 54
- Lewis T., (2012), How to Appraise Any Property: In Today's Economy, Xlibris Corporation, p. 16
- Peca S. P., (2009), Real Estate Development and Investment: A Comprehensive Approach, John Wiley & Sons, p. 67.
Author: Justyna Urbanik
