Understanding gross and net rent can help determine whether to invest in a rental property.
Monthly rent brings in cash income for real estate owners. The lease agreement details the amount of rent to charge per unit. It’s then up to property managers and landlords to find good tenants who pay on time. Before conducting a background check and getting applicants to sign on the dotted line, you’ll have to do some homework.
It’s expensive to maintain a building, with its common areas and multiple apartments. You must factor in those costs into the amount of rent you charge. Once you’ve collected rent and paid for taxes, insurance, repairs and renovations, you still want some income left over.
If you’re thinking about investing in a rental property, you’ll need to know the associated costs, so you can assess whether it’s a good opportunity. That’s why it’s important to understand the difference between gross rent vs. net rent, especially if you’re a first-time investor. Here’s what you need to know before you draw up any lease agreements.
What is gross rent?
Gross rent is a fixed monthly rent charged to the tenant throughout the lease term. To calculate gross rent, you must first add up the total cost of your operating expenses such as your janitor’s salary, your property taxes, insurance and utility bills. While the property manager or landlord is responsible for running the building, rental income should contribute to those costs.
Things like increases in utility fees or unexpected repairs or big-ticket maintenance, such as a new roof or driveway, can crop up at any time. So, it’s important to estimate and calculate your operating costs properly, adding in a small contingency just in case. Then, you can set a gross rate that covers your expenses and leaves you some profit margin, too.
Usually, those costs fluctuate. So, landlords can feel comfortable charging gross rent for short-term and long-term leases for up to 12 months. However, because expenses may change over time, landlords must consider how much they think they’ll pay over the duration of a lease.
In some cases, property managers might include a clause in the lease agreement informing tenants that if unforeseen repairs or significant increases in taxes or utilities occur, they reserve the right to increase the gross rent.
What is net rent and how is it calculated?
Net rent represents your true income. It corresponds to the total amount left over after you subtract your expenses. For example, if you collect $1,000 per month on a unit, you need to deduct your property taxes, maintenance and management costs. Let’s say they were $100 each. That would mean your net rental income is $1,000 minus $300, which is $700.
When a tenant signs the lease, they’re legally obliged to pay a specific dollar amount every month for the duration of the agreement – the gross rent. Sometimes, landlords offer a promotion to lure potential tenants, such as the first or last month free on a 12-month lease. Here’s how you will be doing a calculation to determine their net rent.
When advertising this special, the rent might be listed as $916.67 per month, which takes your promotion into account. The ‘full price’ or gross rent is actually $1,000 per month. In this case, the net rent calculates the total amount owed by the tenant divided by the number of months they owe on their lease agreement.
So, even though the tenant’s gross rent would normally be $12,000, the net rent — thanks to your promotion — means they owe $11,000. The landlord can decide if the tenant pays $1,000 gross rent per month 11 times, or $916.67 net rent per month 12 times.
Convert rent into good profit for you
Real estate is a lucrative industry for landlords and property managers that can convert monthly rent into annual profits. To do this, it’s important to understand basic real estate terminology like gross rent vs. net rent. By figuring out your operating costs and how to cover them through rental income, you’ll have a better foundation for a successful business. Then, you can list available rental units to find responsible, trustworthy tenants who can turn your financial dreams into reality.
Source: rent.com