Tenants pay the monthly rent to real estate owners in exchange for living in their units. The lease agreement details the amount of rent due each month.
How rent is determined by the property owner is based on a number of factors. Maintaining a building is expensive. In addition to your unit, the building might include multiple apartments and common areas. Other expenses include taxes, insurance, repairs and renovations. Since real estate is considered an investment for many owners, any additional rent after paying costs is considered income.
It pays to see if gross rent or net rent works out better and reviewing the terms of your lease agreement is worth the time.
What is gross rent?
When you sign a lease you’re obliged to pay a specific dollar amount every month for the duration of the agreement — this is considered the gross rent. Gross rent is a fixed rent amount for the term of the lease.
Your landlord cannot increase your rent to accommodate unexpected expenses. The property owner is responsible if a utility bill is too high, property taxes increase or maintenance issues arise.
A tenant is responsible for paying the predetermined rent amount by the date it’s due. For example, if your lease is for one year and your rent is $2,000 a month, your annual gross rent is $24,000. Utilities are also sometimes included in your rent.
Gross rent can benefit a tenant because the responsibility of handling unexpected repairs, increases in utility fees or big-ticket maintenance items are the responsibility of the property owner.
To buffer for unexpected or rising expenses, property owners typically build those operating costs into the gross rent. If rent funds fall short, a property owner is unable to recoup the costs from a tenant during the lease unless there is a clause giving them the right to do so, should unforeseen repairs or significant increases in taxes arise. This is why it’s important for tenants to read their lease carefully and know their rights and responsibilities.
What is net rent?
Net rent represents your true expenses as a tenant. Whereas gross rent is a fixed amount you must pay per month, net rent might include other expenses such as utilities which will vary by month and usage.
In some cases, net rent is favorable for property owners because their tenants have to pay expenses such as utilities or even certain maintenance fees or taxes. By putting the financial responsibility of utilities like water, heating and air conditioning on the tenant, the tenant is likely going to be more mindful of their usage.
Gross rent vs. net rent: Which is better?
For most tenants, signing a gross lease is a smarter approach for a few reasons.
It allows you to pay a flat fee and that makes it easier to budget by month. In some cases, you can also save money by knowing exactly how much rent to set aside each month. You don’t need to worry about rising utility costs, maintenance issues or unplanned repairs.
This is especially important during times when things like heating bills increase exorbitantly. Having a gross lease means the property owner will be responsible for absorbing those increases.
Read your lease carefully
Taking the time to review your lease terms and make sure you understand what each clause means is never a waste of time and can benefit you financially in the long run.
Property owners lease apartments because it’s a business and investment for them. It’s in their best interest (and yours) to find trustworthy tenants who respect their property and pay on time.
Understanding the difference between gross rent vs. net rent is just one of the items found in a lease agreement. It can mean hundreds of dollars a month of savings or expenses so it’s worth confirming what’s included so there are no surprises in the long run.
