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Client Questions: What is Effective Rent? Why is it Beneficial?

Effective pricing is pricing that reflects some kind of concession like a month of free rent. It’s sometimes called “prorated” pricing.

It’s used so that you can compare apples to apples. It’s not really fair to compare two similar units in the same location at the same price if one offers free rent for a month. Over the course of a lease you may be saving $2000 with that month free! For me, that would be a really nice racing bike and for you that might mean a couple pairs of Louis Vuittons but the point remains: one of these apartments comes with some serious added value and one does not. In order to compare them we calculate the effective rent by prorating that concession into the price. If we’re talking about a $2000 apartment and a 12 month lease, the effective (real) price is actually $1833.33 per month.

So can you pay the lower (effective) price per month or not? That depends on the building. If they are sophisticated enough (and many are) they may give you a $2000 rent credit on your payment account which would mean you can pay the $1833.33 amount every month and they will siphon the remaining $166.67 from your credit until it’s all gone at the end of your lease. Others have you take the month free up front meaning you pay $0 for your first month and $2000 for the remaining 11 months. This is usually more favorable for people who have large up-front moving costs like those shipping lots of furniture around the country.

So how can you get a month free? Look for new buildings that have opened recently. Realtors often get advance word about these buildings so having one that you trust is a great asset when apartment hunting. Many buildings also have target lease percentages.  For example, if a building falls below it's target of 95% leased they are more likely to offer concessions.

Always keep your renewal in mind! If you’re planning on living in an apartment for more than a year, you always want to ask what the renewal pricing will be based on. In this example, the effective rate is $1833.33 and the market rate is $2000. If the renewal is based on the effective rate and they increase your rent by 5% then you’ll be at $1925 for your second lease. If renewal is based on the market rate than you’ll be paying $2100. Obviously you want your renewal increase based on the effective rent.

Benefits: The obvious benefit of prorated pricing is that you save money but it also helps you make a more informed decision on which apartment you should rent. In the long run, it can also lead to a lower renewal rate when your first lease is up, saving you money next year too!

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