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last updated 10/05/2024

What is net rental income & How to Calculate [+Example]

what is net rental income

What is net rental income or net rent – Property Rent Management  

The real estate business can be highly challenging.

You might have done all the research and bought a great property in a  prime location. Let’s say you managed to get a decent tenant and now expect to make some good revenue from your property.

But only if things could be that simple.

You must account for overall operating costs, maintenance expenses of your property, property taxes, and all other miscellaneous expenses.

Now, you decided on a figure for a regular monthly rent that according to you, should be good enough to cover all the maintenance expenses of your property and generate enough revenue.

But what if you realized you had miscalculated?

The prices of gas and electricity bills suddenly shot up, and you end up making way less money than you thought you would.

What would you do in such a scenario?

To answer that question, you must first understand what is net rental income.

Defining net rental income or net rent

  • Net rental income would mean the amount of money you earn from your rental property after subtracting its costs including repairs, maintenance, management fees, refurbishment, taxes on your rental income, etc.
  • Net rental income is different from gross operating income which is the total of all rent paid by tenants. For example, if your monthly rent is 3,000 USD and you have a one-year lease, then your gross rent would be 36,000 USD.
  • In a nutshell, this would be the rent and other payments you received before subtracting various expenses like maintenance, repairs, insurance, taxes, etc.
  • Your net rent would then determine the profit you earned on your property.
  • While choosing a real estate property, you must bear in mind the operating costs in mind.
  • Choose a property that is in reasonably good condition, even if that means shelling out a bit more.
  • Remember that the net effective rent will ultimately determine the profit earned on your rental income.

Example of how to calculate:

To calculate net rental income, just subtract your maintenance expenses and taxes from the gross rental income.

For example, if your gross rental income is: 10,000 USD.

Expenses are:

  • Insurance: $500
  • Maintenance: $400
  • Property management fees: $700
  • Property Tax: $1,200
  • Mortgage Repayments: $5,000
  • Gross Rental Income: $2,200

What is a modified gross lease?

  1. A modified gross lease is a rental agreement in which the tenant pays the basic rent at the beginning of the lease and then takes on a proportional share of various other costs associated with the property such as utilities, insurance, maintenance, property taxes, etc.
  2.  Modified lease gross leases are generally used for commercial real estate like shopping malls, office complexes, retail complexes, etc.
  3. The extent to which the tenant will cover the maintenance costs and what kind of costs they would cover depends on the agreement.
  4. Some of the agreements would pass on all maintenance and repair-related costs to the tenant, whereas others would pass on some share of the associated costs.
  5. The agreement documents of the gross lease should be reviewed carefully by both parties to avoid any confusion later on.
  6. These kinds of gross leases are common in properties where there is more than one tenant.

What is a full-service gross lease?

A full-service gross lease is a rental lease agreement in which the lessee pays only the base rent to the landlord while the operating costs are covered by the latter.

This kind of lease agreement is generally prevalent in commercial real estate and the operating costs here would refer to additional maintenance costs including insurance premiums, property tax, maintenance and repair charges, etc.

This kind of gross lease seems to place the lessee at an advantage since they don’t have to bother with all the additional operating costs and just pay a fixed rent. It helps them to plan their finances better and escape emergency expenditures.

But, on the flip side, the base rent in this type of rental agreement is generally quite high. So they actually might end up paying a higher amount overall.

Tips for property management

Real estate management can be a tricky business for landlords.

You must keep certain points in mind while managing rental properties.

1.      Set clear-cut policies and protocols

You must set clear-cut protocols and policies for the signing of lease agreements and maintenance of the property.

Depending upon the nature of the property, you must determine the kind of gross lease that will be best suited.

Your agreement must clearly mention the categories of operating costs for which the lessee is responsible so that there is no conflict later.

2.      Schedule regular inspections of your property

Regular inspections are a must to ensure your rental property is in the best of shape at all times.

If you are leasing out your home on rent, this becomes even more crucial.

You must guide the lessee on getting any repair or maintenance-related problems fixed. Help them with the contacts of local plumbers, electricians, masons, carpenters, etc to get the common problems fixed.

You must especially inspect those elements like smoke/fire alarms, roofs, fire/emergency door access, windows, water lines, etc are in good condition.

3.      Keep the operating costs reasonable

You must keep the operating costs of your property reasonable. This becomes especially important if you are going for a full-service leases gross lease.

Plan in advance. Do not neglect even the smallest of repairs. Keeping your property in shape would save you emergency expenditures later on.

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