If you’re in the market for a rental property, you may find yourself coming across the terms ‘net rent’ and ‘gross rent’. This article by Business Kitz provides you with a simplified explanation of what these terms mean, how they work and which option might be right for you.
What is net rent?
Net rent refers to the negotiated base rent that a tenant pays. In addition to this, the tenant is required to pay for outgoings. This is usually a percentage of the space they occupy in the building. For example, generally if a tenant occupies 10% of a building, they would be required to pay 10% of the total outgoings listed and agreed in the lease. Outgoings can include:
· Maintenance and repairs;
· Real estate taxes;
· Insurance costs;
· Council rates;
· Water rates;
· Strata fees; and
· Management fees.
What is gross rent?
Gross rent is essentially an all-inclusive version of net rent, as the rent period payment accounts for outgoings, too. Under a gross payment, the total outgoings paid to the landlord or rent collector increases at the same rate as the rent.
What are the advantages and disadvantages of net vs gross rent?
Advantages & disadvantages: net rent
- If the cost of outgoings decreases, the tenant pays less for outgoings
- Allows tenants the option to limit their usage of outgoings
- Tenant is responsible for paying outgoings
- Uncertain rent costs due to possible fluctuations in outgoing costs
- If costs of outgoing increase, tenant must pay more for outgoings
- Overall, more advantageous for the landlord as they can determine exactly how outgoings are paid
Advantages & disadvantages: gross rent
- Gross rent limits the amount that the rent is going to cost for the tenant, because the tenant is not obligated to pay for outgoings
- The tenant will know exactly how much the rent will be and no surprise costs will surface due to outgoings
- Rent charged is usually higher because it is based on an estimate of outgoings costs created solely at the landlord’s discretion
Which is better?
Generally, if the outgoings are going to remain constant, decrease, or if the property does not require much upkeep, a net lease option would be ideal. On the other hand, if outgoings are likely to increase it may be better for a tenant to consider a gross lease to eliminate the obligation of paying for outgoings. A gross lease will favour the landlord if the outgoings increase at a lower rate than the rental amount.
As you have learnt, deciding which lease arrangement is best for you can be quite a complex and confusing process. There are a multitude of factors involved, so we recommend seeking legal advice. Our sister company, Legal Kitz, can assist in all things related to leasing properties to ensure you get the most out of your lease agreement whether you are a potential tenant or landlord. You can book a free 30-minute consultation with our experienced and highly qualified team via our website now.