The Liability of Loss to Lease

Loss to lease is typically thought of by new investors as an opportunity to raise rents up to the properties marketed rates. What this does is prompts the buyer to pay a higher price because in their business plan, the loss to lease will decrease within a year or two.

What these buyers don't always see is that the marketed rents on the property can be set to any number. For instance, the seller, in their attempt to get the highest sale price possible, could raise marketed rents by 8% in the final year. An offsetting increase of 8% would be added to loss to lease.

So why would a seller make this increase of 8% to marketed rents in the final year when it would be unlikely for that rent amount to be attained? With the offsetting loss to lease increase, it doesn't change the effective rental income at all.

The reason sellers do this is because they know deals are bought and sold based on proforma projections. If they can convince an unsophisticated investor that those unrealistic rents can be achieved and loss to lease will seamlessly be burned off, then they'll get a high sale price.

Solution:

Do your own research on what you believe attainable rents could be. Create your own gross potential rent in your personal proforma.