Today we will explore the concept of Loss to Lease (LTL) and understand how monitoring loss to lease trends can provide insight into the potential of a real estate investment. We will also learn about the factors that affect LTL, and study the data from a few key markets.
What is Loss to Lease?
Loss to Lease is used in real estate and commercial property management to evaluate the potential impact of leasing decisions. It measures the difference between the current rent a property is generating, and the potential rent that the property could generate if it were leased to a different tenant or under different terms. LTL provides valuable insight into the financial performance of a property and helps property owners and managers make decisions about lease renewals, rent increases, and marketing strategies.
How do you Calculate Loss to Lease?
It is calculated by finding the difference between the current rent, and the market rent that could be received if the property were leased to a new tenant or under different terms. The formula for LTL is as simple as it gets:
Loss to Lease = Current Rent – Market Rent.
For example, if a unit is being rented for $1,800, and the market rent is $2,000, the LTL is $200.
To calculate the market rent, the property owner or manager needs to consider several factors, including location, size, condition, and demand. They may use market reports, appraisals, and other data sources to determine the market rent.
Keep in mind that LTL is a theoretical calculation and does not take into account the actual cost of leasing a property to a new tenant or the time it would take to find a new tenant. Nevertheless, it provides valuable insight into the financial performance of a property and helps property owners and managers make informed decisions about leasing strategies.
What Factors Affect Loss to Lease?
There are a few macroeconomic factors to consider. There are also individual factors, which are not discussed here for the sake of brevity:
It’s important to stay informed about these factors and how they are affecting the rental market. By monitoring Loss to Lease trends and the impact of economic and political factors, property owners and managers can make informed decisions about leasing strategies and improve the financial performance of their properties.Key Market Analysis To understand the state of the current housing market, we will dig into the multifamily markets of a few major cities across the country: Vancouver, Calgary, and Toronto. Reports may refer to “in-place market rents,” as the current rent, and “lease-over-lease change” as the term for market rent. Let’s dive in:
Vancouver experienced 4.4% in place rent growth, with a 7.3% change in new lease rents. Calgary showed a 1.3% increase in in place rents, and a 2.0% increase in market rents. Toronto experienced 2.4% in rent growth, and a 7.2% increase in market rents. The most significant changes occurred in secondary markets like Hamilton, London, and Halifax.
So, what does this mean? Well, as property prices finally begin to weaken, those who have been sitting on the sidelines are looking to buy. With major metro markets typically lagging behind midsize cities, it’s no surprise that markets like Hamilton and London are seeing larger shifts. Citizens are moving from the more expensive cities to take advantage of the real estate prices, particularly in an age of remote work. Canada’s aggressive immigration targets, strong economy, and return of international students all indicate that these trends will continue. Current landlords with well kept properties can expect high demand throughout the years to come. Owners of older real estate may seek to invest in property itself to command higher rents, or explore densifying an older property.
Hopefully our readers now have a better grasp of the concept of Loss to Lease (LTL). Measuring the difference between the current rent a property is generating and the potential rent that the property could generate is a simple and effective way to understand how your property is performing in comparison to the market. Staying up to date on market reports is a great way of generating insights that can maximize the financial performance of any property. Loss to Lease is a crucial metric for evaluating the financial performance of a property and making informed leasing decisions. By understanding the factors that affect LTL and staying informed about market trends, property owners and managers can make the most of their real estate investments and drive success for their properties.