Certified Residential Appraiser Practice Exam

What does the term 'effective rent' aim to evaluate?

1. The gross amount paid by the tenant

2. The actual rent received after concessions

3. The total agreed rent in the lease

4. The rate of return on investment

The correct answer is: The actual rent received after concessions

The term 'effective rent' is designed to give a realistic view of the rental income that landlords can expect after accounting for any concessions or incentives offered to tenants. This includes things like reduced rent for the first month, free parking, or upgrades to the property as part of a lease agreement. By calculating effective rent, appraisers can assess the true economic benefit that the rental property generates over time, rather than just looking at the nominal lease amount. While the gross amount paid by the tenant reflects the leasing arrangement in a straightforward manner, it does not account for any inducements or adjustments that might influence the actual cash flow. Similarly, the total agreed rent in a lease provides a face value but lacks the nuance of reflecting a landlord's actual income. The rate of return on investment, while important for evaluating the profitability of a rental property, does not define effective rent, which focuses specifically on rental income after concessions. Therefore, the accurate assessment of effective rent captures the real financial scenario for property owners.