The Benefits of Using Market Rents Instead of Current Rents in Multifamily Underwriting

Current Rents:

The most recent rents actually achieved for each unit type on the property.

Market Rents:

The rental amounts that are advertised on the property.

One industry standard in multifamily underwriting is to input the current rents into the unit mix section.

I prefer using market rents.

The reason I do this is as follows:

1.) What people do is use the current rents multiplied by the number of units to come up with their gross potential rent. The problem with this is the underwriting tool already accounts for economic vacancy, including rental discounts (categorized into loss to lease). If you account for rental discounts in addition to rents that may have already had the discount applied, you're accounting for the discounts twice.

2.) One of the most useful applications of inputting the unit mix data is to compare the unit mix rents to other comparable rents. The information you will get from comparable properties will be the rents that are marketed, not what is actually achieved after discounts. If you compare your current rents to the comparable properties market rents, you could be comparing discounted rents to non-discounted rents.