What Does Net Effective Rent Mean in Chicago Apartments?

Renters in Chicago are likely to consider offers for a month of free rent in exchange for signing an extended lease. Some landlords in Chicago even offer two months of free rent to get tenants to sign a lease ahead of the slower rental market in winter in Chicago. Tenants should consider whether a month of free rent is as valuable as it sounds,  particularly if the landlord is making up the difference by charging an inflated rent for the remainder of the lease term.

Landlords sometimes try to entice renters by offering a free month's rent and advertising a "net effective rent."  Be careful, renters, because "net effective rent" is not the same as the actual monthly rent charged — rather, it is meant to describe the average cost of monthly rent over the course of the lease term, with the free month included in the average.  

How to Calculate Net Effective Rent for Chicago Apartments

Here's how net effective rent is calculated: 

  1. Take the value of advertised free rent. 
  2. Divide that number by the number of months of the lease term minus the number of months of free rent. (For example, if the lease term is for 12 months, and there is one month of free rent provided, you divide the value of the free rent among the remaining 11 months of the lease term for which you will be paying.)
  3. Subtract that amount from the actual monthly asking rent, also known as the gross monthly rent, to get the net effective rent.

Let's look at a hypothetical example. If a listing offers net effective rent of $1,300 due to a month's free rent, what is the actual monthly rent the tenant will pay during the 12-month lease? $1,418.18.  

Here's how it's calculated:

  1. $1,300 in free rent (one month free)
  2. $1,300/11 months = $118.18 
  3. Gross monthly rent is $1,300 + $118.18 or $1,418.18 for the remaining 11 months of the lease term.

In this case, the annual fee is $1,418.18 times 11 months, or $15,599.98.   

Now contrast this to an apartment listed for $1,300 per month for a 12-month lease agreement with no free rent offered. In that case, the annual fee is straightforward: $1,300 times 12 months, or $15,600. As you can see, an apartment listed for $1,300 with no free rent is nearly the same cost as an apartment listed for $1,418.18 with one free month included.

Will Renters Get the Same Incentive for Renewing the Apartment Lease?

Imagine now that the renter will seek to renew the lease at the end of the lease year. If the landlord doesn't offer another free month's rent with the renewal, the tenant will not benefit from the net effective rent offered during the initial lease year. They will be required to pay $1,418.18 in monthly rent in the second lease year (if there is no additional rent increase) — which is undoubtedly more expensive than renewing a lease at a base rent of $1,300 per month. 

At Domu, we encourage landlords to list the actual monthly rent and list concessions separately rather than advertise a blended "effective monthly rent."  We want tenants to have a clear idea of the monthly rent obligation as they consider their options. But even if landlords advertise an "effective monthly rent," the lease agreement should state the actual monthly rent obligation.  

The bottom line is that a savvy renter might find that the annual cost for an apartment with lower market rent and no rent concession is a better deal than a similar apartment offering a free month and a higher monthly base rent —  particularly if the renter intends to renew their lease for another year. 

Landlords and tenants alike should remember that the newest amendments to Chicago apartment law require the landlord to give extra advance notice for a raise in the rent — and if the landlord doesn’t offer the same concession for the renewal year, then the landlord is effectively raising the rent. Tenants should consider whether they can afford the actual monthly rent, without the concession of a free month, if they think they might want to renew after the initial term concludes.