When you sign a lease for an apartment or a house, between the fine lines, you might have seen these two terms: gross rent and net rent. What are these two types of rent, and what do they entail? In this blog, we’ll dive deep into the differences between gross rent vs net rent and what both of these stand for. We’ll also try to understand which one is better for you as a tenant and as a landlord. This is everything you need to know about gross rent and net rent.
What is gross rent?
Gross rent, as the name implies, is the amount paid in lieu of rent before utilities and other expenses, for example, house upkeep and maintenance. From the tenant’s standpoint, gross rent is simply the amount that is paid as rent according to the lease agreement, whether it’s monthly or bi-monthly.
Gross rent is fixed and is usually set as per the lease agreement. Since it is fixed by the lease and is agreed to by both parties, gross rent will not change without any notice, and in some places and cases, gross rent cannot be increased before a certain amount of time has passed for the tenant.
What is net rent?
On the other hand, net rent is the amount that subtracts the utilities and any other expenses from the gross rent and is considered disposable income for the landlord. On the tenant side, net rent comes about due to net leases. Net leases are agreements between tenants and landlords where costs like property tax, utilities, maintenance, and other expenses will be borne by the tenant and are included in the monthly rent or as per the agreement.
Net rent, unlike gross rent, is not fixed and varies on all of the costs mentioned beforehand. In a net lease, since the tenant agrees to pay these costs, these will vary and are a good way for landlords to save their income on such expenses. It can also allow the tenant to monitor and strictly control their utility usage like water, gas and electricity.
Gross rent vs net rent: which is better for whom?
Since the particulars of both these rent types are opposites, both of these tend to favor opposite sides too. For instance, while gross rent might require a hefty amount to be paid every month on a fixed date, this makes the tenant not liable for utilities and other expenses like property taxes and maintenance, which can be a lucrative setting for a tenant, especially one who might have a higher utility consumption than normal. In the case of gross rent, tenants usually benefit from it, since the fixed amount covers almost everything and they don’t need to pay extra or go through the hassle of calculating and paying the property tax on the premises that are being rented.
On the other hand, net rent tends to favor the landlord. In a net lease, the tenant bears the responsibility for things like utilities and taxes, which are included in the rent as per the agreement. This favors the landlord because these costs do not come out of their income, and the tenant tends to keep the utilities and maintenance costs down since they will have to pay for it, which means fewer expenses. On the flip side, net rent agreements and net leases can be problematic for the tenant. Aside from paying the fixed monthly rent, which can be the gross rent, they are also responsible for overhead costs, which may fluctuate depending on the usage, which could cause additional burden. In a gross rent situation, budgeting for tenants becomes easy since they know how much needs to go out for the rent and can budget their expenses around that.
However, in a net lease and net rent situation, since rent and utilities and any other costs may fluctuate, this makes it difficult for the tenant to budget beforehand and can be problematic. This is why it is always advisable for tenants to carefully read their lease agreements and pay special attention to these clauses involving rent payments and agreements, since several of them could potentially benefit them while others may not be good.
Now, we will look at the different types of net leases and what they entail regarding net rent.
The different types of net leases
There are three types of net leases that can result in net rent that may balloon based on the amounts owed. Again, reading and properly understanding your lease agreement is important to avoid financially burdensome leases that may trap a tenant in an unfeasible cycle.
- Single net lease: Single net leases require the tenant to pay both the gross rent and the real estate tax, usually levied by the county or local government. This is usually preferred by both tenants and landlords as it helps keep costs down and predictable for the tenant while allowing the landlord to keep the gross rent as income.
- Double net lease: In a double net lease, the tenant will pay the gross rent, property tax, and the insurance amount on the property. This is usually the preferred option for a lot of high-end rentals since it helps keep costs down for the landlord and shares some of the liability with the tenant, who is actually using the property.
- Triple net lease: In one of the least financially feasible arrangements for the tenants, a triple net lease will have them pay the net rent, net property tax, the net insurance, and the net maintenance for the building. Again, these extreme examples of leases are reserved for the more high-end property rentals.
The importance of reading and understanding your lease agreement
Considering how much of a financial burden rent can become for salaried individuals, it is ever so important to carefully read and understand a lease agreement before being bound by the agreement. Take the help of a lawyer if possible and try to negotiate the rent to something a little more palatable. Reading and understanding the lease agreement will help you modify the agreement to something that does not infringe on your rights.
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