Loss-to-Lease
Loss-to-lease is an economic vacancy line item that describes how much the operator is losing by charging rents below the market rates. Especially in fast-growing markets where rents continue to rise, each property will have loss to lease at some point. As the buyer, loss-to-lease could be evidence that there are further opportunities to raise the rental rates over time.
Operators should hardly really close on loss-to-lease, getting to a zero loss-to-lease number. This would mean that they are completely leasing with rents that are spot on with the with the market. As unlikely as this is, if this were to occur, that management team should likely be raising their rents. They are likely making concessions on rents, especially as quickly as the market rate grows during this inflationary time.
It is important for operators and management teams to understand their local market and the demand trends within. As passive investors, for your next investment, vet your sponsor and be sure that they have a great pulse on the market in which they plan to invest. Market expertise is critical to the successful investment and managing rent growth is essential to any operational value-add strategy.
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