Loss To Lease: What It Is, What It Isn't

What It Is:

Loss / Gain to lease is the difference between what rents are marketed for today at a property compared to what the existing lease agreement rents are at.

If you increase rents, you can’t change the rent amounts on lease agreements that haven’t expired yet. You can only change them when a new lease is signed. Naturally there will be some lag time for these rents to catch up.

When the lag time makes existing rents lower than what is marketed today, this is Loss to Lease.

Say rents are lower today than they were 6 months ago. The lag time would actually create existing rent agreements to have higher rent than what is marketed today. This would be a Gain to Lease.

What It Isn't:

Since many people don't fully understand Loss / Gain to Lease, including multifamily teachers, the term gets overcomplicated with wrong information. Here are the main misunderstandings:

1.) It is not a rental discount.

Loss / Gain to Lease is purely an accounting entry. It's because of the lag time talked about earlier. Nothing else.

2.) It is not economic vacancy.

If you count loss to lease into economic occupancy, you're saying that loss to lease and items such as bad debt are of equal negative weight.

How to calculate:

• Loss to Lease accounts for the occupied units at the lower rent only. It does not account for the vacant units

  • $1,500 - $1,400 = $100 Loss to Lease per occupied unit

  • $100 x 100 units at lower lease = $10,000 for that month

• "Total Rental Income" = $195,000 - $10,000 = $185,000

• You would then subtract all economic vacancies from the Total Rental Income to get your Total Adjusted Rental Income