I took care of this patient once who came in to the ER with chest pain I later found was from a mild heart attack. This lady was mid-40s, and with a few things in her history that would make it more likely to have a heart attack, she was still pretty low risk. Her biggest issue was that she kept going to her doctor for her physicals and being told she had high blood pressure, but she never took her doctors’ advice to start a medication.
The day I she came in, her blood pressure was 164/96, pretty high. When I asked her why she hadn’t ever taken anything, she replied that she didn’t think she needed anything. After all, she didn’t feel bad. And medication costs money. I couldn’t help but wonder if she had taken a blood pressure medication all these years if she might not have had a heart attack that day.
What is Loss to Lease
Loss to Lease (L2L) creeps up on the unsuspecting landlord. It’s a simple idea: it’s the amount that the landlord is losing in rent by charging below what the market rate is. It’s so easy for the L2L creep up as market rents rise. The landlord keeps reassuring himself that everything is fine – the mortgage is being paid. Raising the rent comes with a cost too: tenants might leave. Meanwhile, the L2L gap gets wider, tenants don’t leave because they realize that rent anywhere else is higher. They tend to complain less, and there is less turnover. It seems great, right?
Like the mid-40s person whose arteries are slowly hardening from high blood pressure, the landlord knows less about what is happening with the property, repairs aren’t getting reported, and when the landlord decides to sell, the value of his property is significantly lower than others in the area because his NOI is so low. He ignored the problem because it was easier.
How Do I Use Loss to Lease?
It’s great to be calculating this every year or every other year on your properties. You should be raising the rent to keep up with the market anyway, and watching what the market is doing is a good way to do this accurately.
If you are a buyer, L2L is very important. This tells you how much the property could be bringing in if the landlord had been keeping up with the market. A great sign of this is if the seller is boasting 100% occupancy. This probably means that his rents are too low and there is opportunity for adding value.
Keep in mind that L2L might be high because of other reasons. Perhaps the property is right next to a train that goes all night long. Maybe it is next to a meat packing plant and there is an odor. Figure out why the L2L is high and figure out ways you can correct it. If you can’t then take a pass on the property.
Much like my patient, keeping up with issues in the property, such as raising rents to market values, causes some extra work, but will pay off in the end.