Amortized or net effective rent is calculated by dividing the total rent you have to pay (after any rent discounts or concession) over the lease term by total months in the lease.
A rent discount or rent concession is when a landlord offers you one or more “rent-free” months on your first lease. This is done to make a rental property more attractive for tenants. Other such tactics include no maintenance fees for the first months. An example can be a landlord offering one month of free rent on a one-year lease.
Two Different Methods of Rent Concession
This discount can be offered in two ways:
The most common method is that you pay the full gross rent for all the months, but then you get to skip the last month’s rent altogether.
The second method of applying this discount is that one month’s discount is spread out over the twelve-month period. You will pay rent for all twelve months, but each month’s rent will be reduced by applying the discount.
It’s important to understand that in both cases, you end up paying the same rent over the course of the lease.
Amortized or Net Effective Rent Term Confusion And An Example
The term net effective rent often confuses tenants because they see one amount on the listing, and when it comes time to pay the actual rent, it’s a bit higher than the amount they saw on the listing. An example can clear this up.
Let’s say you find an apartment that’s offering one-month free rent on a one-year lease. And there are two rents on the listing: Gross rent and net effective rent. The gross rent is $4,800 a month, whereas the net effective rent is $4,400 a month.
The amount you will pay each month will depend on how the landlord is offering a discount.
Method-1: You will pay gross rent (higher amount) for 11 months, and for the last month of the lease, you don’t pay any rent. You end up paying:
One-Year (Lease Term) Rent = $4,800 x 11 = $52,800
Method-2: You pay net effective rent for all 12 months. So over the course of the lease, you will pay:
One-Year (Lease Term) Rent = $4,400 x 12 = $52,800
So even when you are supposedly paying full gross rent, if you get to skip one month’s rent, you will enjoy the same concession if the discount was spread out over or amortized over the full term of the lease.