Digging deeper into real estate investment terms can help you build key strategies for maximizing your profits. After all, knowledge is power. One often misunderstood term is “loss to lease,” or sometimes also known as “loss to market.” Loss to lease is the difference between your gross potential market rent and your actual rent. For example:
You have a one-bedroom apartment available. Comparable properties on the market go for $550 (your gross potential market rent). You end up renting it for $500, making your loss to lease $50.
Keep in mind that this is only a loss to your potential income. You could be making $50 more a month on the property, but you haven’t actually lost the income. That means it’s not deductible as a loss.
Loss to lease is an important item to show on profit and loss statements as well as your rent rolls. While not all rent rolls will include this information, they should. Once you know what your loss to lease is, you can use that information to help increase the profitability of your property. Your goal is to get higher rents from your new and renewing tenants.
7 Ways to profit from “loss to lease” information
1. Shows your potential income in black and white.
It’s hard to be complacent when the numbers are there in black and white! You’ll be able to see in writing what your potential income is versus what you are actually bringing in. That can be a great motivator to take action.
2. Identifies where your current rentals are falling short.
If your loss to lease is much higher than you expected, then maybe it’s time to look at how to improve your property. Is it time for renovations? Do you need to explore new amenities? Or is your marketing strategy falling flat? Take a look at where your properties are falling short and find ways to boost their appeal on the market.
3. Gives you a performance baseline for property managers.
When you know what your potential income should be, you’ll be able to determine how well your property management company is performing. If they are exceeding your expected income, that’s great! If they are falling well below it, though, it may be time to look at another company. Resident exit surveys can be helpful here. Your residents interact with your property managers the most. They may have important insights into their performance to share with you.
4. Helps you course correct and set new targets.
Course correcting early can help you avoid disaster later on. You can do this by using new tactics such as rent surveys or changing up your leasing strategies. The information you get here will help you make more informed capital investments as well as smart improvements to your current operation. You’ll also be able to attract higher-paying residents.
5. Assists you in monitoring for other potential losses.
If you are already showing a loss to lease on a property, that can be a red flag that you don’t want to offer any other concessions on the property. For example, if you already have a $50 loss to lease on an apartment, you don’t want to renew the lease for $25 less. Ideally, you’ll work to renew the lease at the gross potential market rent rate. That will eliminate the loss to lease amount. You’ll want to avoid incentive offers like free rent, too, as they will add to your potential losses.
6. Is an opportunity to evaluate renewal policies.
Are your current renewal policies adding to your losses? If you are showing loss to lease on many of your properties, you may need to rethink your renewal policies. There may be an incentive plan that encourages renewals at a higher rental rate. Creating tenant retention strategies can help you keep your good renters in place while still maximizing your market rates.
7. Allows you to set new performance goals for your team.
With this data, you’ll be able to create an annual operating budget that can help you stay on track and track performance. You can set new goals for yourself and your team, too. Maybe that’s developing strategies to keep tenants on board while increasing their rent. Or maybe it’s working on improving your brand and using it to bring in higher-paying tenants.
A little bit of data goes a long way. That’s true when it comes to analyzing your current rental properties, too. Looking at the data will help you understand how to maximize your income potential. If you aren’t sure how to develop the right strategy for your property, talk to an experienced rental investment consultant. They’ll be able to help you develop an in-depth submarket analysis. Then you can see where your property is performing well and where it can improve. Looking for help with your current property portfolio? Contact Theresa Bradley-Banta to schedule a consultation today.