Loss to lease is the gap between what units would rent for at market today and what the current leases actually charge. It is income the building is entitled to and is not collecting, and unlike most upside it requires no construction, only turnover and time.
- It is only real if the market number is real. A gap measured against an optimistic market rent is a gap against nothing.
- Capturing it takes turnover, and turnover costs vacancy, make-ready and time. Model the cost of getting there, not just the destination.
- Long-tenured tenants are the gap and the reason it exists. Raising rents is a decision about people, and it belongs to the owner.
- A seller who prices the closed gap is asking to be paid for work he did not do.
The same eight units: leases at $1,650 against a market of $1,800, both inside the range the neighbourhood is renting at.
A hundred and fifty dollars a unit is $240,000 of value at the cap rate. That is the arithmetic behind every conversation about raising rents.
Related terms
All termsValue-Add
Value-add describes a property whose income can be raised by doing specific work: renovating units, correcting below-market rents, fixing operations, adding a use, or curing something that keeps buyers away.
OwnershipRent Roll
A rent roll is the schedule of every unit in a building and what it earns: the tenant, the rent, the lease start and end, the deposit held, and whether the unit is occupied.
MarketsEffective Rent
Effective rent is what a lease actually pays over its term once concessions are spread across it: free months, moving allowances, reduced deposits.
Terms arrive with the writing.
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