Net Effective Rent Calculator

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Based on 1 source

1. Kroll, Cynthia A. The Measurement of Effective Rent; UC Berkeley Fisher Center Working Papers ; March 1, 1988

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Table of contents

If you're scratching your head while figuring out the profit from renting out an apartment, you should try this net effective rent calculator. With just a few clicks, you will be able to determine how much you'll 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 helpful for rental only. If, on the other hand, you're interested in buying or selling a property, check our mortgage calculator or cap rate calculator, respectively.

Gross rent vs. net rent

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

Unlike regular rent, the net effective rent considers multiple factors, such as the lease term or negative cash flows. For example, your NER will drop if your tenant receives one month of rental free of charge. 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 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 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 effective rent. You can use the formula below:

NER = 12 × [ BR × ( Term − N ) − TA − OC × Term ] / Term \scriptsize \begin \text = 12 \times\!\! \big[\text\times (\text - N) - \text\ - \\ \text\times \text\big]/\ \text \end NER = 12 × [ BR × ( Term − N ) − TA − OC × Term ] / Term ​

• B R \rm BR BR — Base rent per month;
• T e r m \rm Term Term — Lease term in months;
• N N N — Number of rent-free months in the contract;
• T A \rm TA TA — Tenant cash allowance (in total); and
• O C \rm OC OC — 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 check the Enable area-based calculations? question at the bottom of the calculator to enter base rent and tenant cash allowance per square meter or 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 following 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 8\% \times \$3200 = \$256 8% × $3200 = $256 per month.
5. Input all of these values into the net effective rent formula:

NER = 12 × [ BR × ( Term − N ) − TA − OC × Term ] / Term = 12 × [ 3200 × ( 24 − 1 ) − 4000 − 256 × 24 ] / 24 = 63456 / 2 = $ 31,728 per year = $ 2644 per month \scriptsize\quad \begin \text &= 12 \times\!\! \big[\text\times (\text - N) - \text\ - \\&\qquad\qquad \text\times \text\big]/\ \text\\[1em] &= 12 \times\!\! \big[\text\times (\text - 1) - \text\ - \\&\qquad\qquad \text\times \text\big]/\text\\[.5em] &= 63456 / 2\\[.5em] &= \$\text\\[.5em] &= \$\text \end NER ​ = 12 × [ BR × ( Term − N ) − TA − OC × Term ] / Term = 12 × [ 3200 × ( 24 − 1 ) − 4000 − 256 × 24 ] / 24 = 63456/2 = $ 31,728 per year = $ 2644 per month ​

1. 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 m 2 = 396.60 $ / m 2 per year $ 2644 / 80 m 2 = 33.05 $ / m 2 per month \scriptsize\qquad \begin \$31728 / 80\ \text m^2 &= 396.60\ \$/\text m^2\ \text\\ \$2644 / 80\ \text m^2 &= 33.05\ \$/\text m^2\ \text \end $31728/80 m 2 $2644/80 m 2 ​ = 396.60 $/ m 2 per year = 33.05 $/ m 2 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 based on a suggestion from René Guemps. Thank you!