Loss to Lease (LTL)

Loss to Lease (LTL) vs. Gain to Lease (GTL): What is the Difference?

The inverse of the “loss to lease” is termed the “gain to lease”. The two occurrences are virtually identical. However, the beneficiary is switched, as one would reasonably expect.

• Loss to Lease (LTL) → If the current market rent exceeds the actual in-place rent paid by a tenant, the scenario would be categorized as a loss to lease since the property owner incurred a monetary loss (and the tenant benefits from the locked-in structure of the lease).
• Gain to Lease (GTL) → If the current market rent falls below the actual in-place rent, the circumstances are referred to as a gain to lease. Unlike the prior scenario, the property owner benefits because the actual rent paid remains fixed, irrespective of the market rate reduction.

If a multifamily investor is underwriting a property with a substantial loss to lease, the property could present an opportunity for the investor to acquire the property at a steep discount and increase the rent closer to the benchmark market rent of comparable properties.

The loss-to-lease metric in multifamily investing is thereby a critical metric for analyzing multifamily properties and deciding where to allocate capital.

By implementing a more optimal pricing strategy and integrating value-add improvements to the property, the loss to lease should decrease, while the property value rises from the increase in demand in the market.

Loss to Lease Calculator (LTL)

We’ll now move on to a modeling exercise, which you can access by filling out the form below.

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1. Real Estate Multi-Family Property Assumptions

Suppose a property owner is estimating the loss to lease (LTL) on a multifamily real estate property investment based on different pricing strategies.

The property has a total number of 10 units available for rent, with a market rental rate of $4,800 based on recent historical data and market research, i.e. the pricing of comparable properties located nearby (“comps”).

• Total Number of Rental Units, One-Year Lease = 10 Units

But unexpectedly, the outlook on the real estate market (and the broader economy) seems unfavorable because of the widespread concerns regarding a long-term recession.

In an effort to mitigate the risk of an unoccupied unit, the property owner decides to be risk-averse by offering one month for free to all tenants who sign a lease during a limited period of time.

Because the property is located in a city with significant demand, offering one month was enough for all 20 units to be quickly occupied, i.e. it reaches a vacancy rate of zero.

• Occupancy Rate = 100%
• Occupied Units = 10 Units

The one-month free offer reduces the annual rental payment per unit from $540,000 to $486,000, reflecting a price reduction of 9.1%.

• Actual Rent, Monthly-Basis = $40,500

In contrast, the market rent on a monthly basis, inclusive of all ten tenants, is $45,000.

• Market Rent, Monthly-Basis = $45,000
• Net Differential, Monthly-Basis = $45,000 – $40,500 = $4,500

Instead of reducing the price stated on the contract, the property owner offers one free month for all tenants signing a twelve-month lease, which is a relatively common practice in the rental market.

The formula to determine the actual rent, expressed on a monthly basis, starts by multiplying the number of occupied units by the market rent.

Once complete, the rental concession offered by the property owner (i.e. the one free month) is multiplied by the market rent, which is then subtracted from the initial step.

2. Loss to Lease Calculation Example (LTC)

If no concessions were offered, the total rental income paid by each tenant would amount to $540k on an annual basis.

• Market Rent, Annual-Basis = $45,000 x 12 Months = $540,000

The property owner is offering one free month to incentivize potential tenants to sign a twelve-month lease – but in the prior section – we already adjusted the market rent to calculate the actual rent for all tenants on a monthly basis.

• Actual Rent, Annual-Basis = $40,500 x 12 Months = $486,000

The net differential between the two figures – $540,000 less $486,000– amounts to $54,000, which reflects the concept of loss to lease.

• Net Differential ($) = $540,000 – $486,000 = ($54,000)

In conclusion, we’ll divide the net difference by the market rent on an annual basis to arrive at a loss-to-lease rate of 10.0%, which can be perceived as the foregone “upside” that the property owner lost to ensure a full occupancy rate.

• Loss to Lease (%) = ($54,000) ÷ $540,000 = (10.0%)