Calculating rental pricing on multifamily assets can be one of the most complex parts of the management process. How do you strike a balance between ensuring you are valuing your properties appropriately while also not putting off quality tenants with too-high prices?
The optimal rental price for your property depends on a number of factors. These include the competition in your region, the desirability of the property and location, and the overall state of the rental property market. Choosing the most suitable price point requires robust research on all relevant factors.
Fortunately, rent optimization software can make these decisions easier. In this post, we will show you how.
What Is Rent Optimization?
Rent optimization is a system that allows you to maximize rental income and takes into account all the factors we’ve listed plus any other relevant variables, as well as data from your property management system, to ensure that you are not leaving money on the table.
Rent optimization prices new and renewal leases at the current market rate and adjusts accordingly to ensure that you get the best possible income, without having to conduct manual market research daily or weekly in order to make the right pricing decisions.
Loss to Lease: What It Is and Why It Matters
Naturally, you want to get as much income from your rental unit as possible, ideally at or above the going market rate for your area. However, sometimes the actual rent you charge does not reflect this.
Loss to lease is one of the most important and widely used calculations in the real estate rental market. In brief, it refers to the difference between the unit’s theoretical market lease rate and the actual lease price that the owner is receiving from the unit.
For example, let’s imagine your unit is worth $2,000 per month at market rate, but you’re actually renting it out for $1,600 per month. The loss to lease calculation is the difference between those two figures, which in this example would be $400 per month.
It’s important to note that loss to lease isn’t a “loss” in the sense that it will cost you money or appear in the outgoings column of your balance sheet. Instead, the loss to lease expense can be conceptualized as an “opportunity loss.” In other words, it shows that you are not, perhaps, charging as much for that rental unit as you could be.
Understanding your loss to lease rate allows you to closely analyze your properties’ performance and ensure that you are getting the most out of them. Loss to lease also matters when you are acquiring or considering acquiring a rental property. A high loss to lease rate might indicate an opportunity to raise rents and/or to improve the property in order to command a higher rental price.
What Does a High Loss to Lease Indicate?
If your loss to lease figure is high, it can indicate one of several things.
It might suggest that your property is lacking something compared with the competition in your area. If this is the case, you might need to make improvements to your unit before increasing the rent (and you will need to weigh whether the cost of doing so is worth it for the increased rent).
A high loss to lease can also suggest that the overall rental market in your area has grown and that you have not increased prices on your property to keep up. If this is the case, it can indicate that it is time to raise the rent.
Of course, it is also possible to intentionally and strategically accept a larger loss to lease rate than you might otherwise like. For example, you may offer a discount to a particular tenant to obtain better lease terms. You might also choose not to raise the rent to retain a high-quality tenant, rather than going through the effort and expense of advertising your property and finding a new tenant.
How Rent Optimization Software Can Help You
As with so many aspects of running a real estate business, the right software can help you carry out rent optimization calculations and make the best decisions to maximize your rental income.
Some of the numerous tools you can use include RENTmaximizer by Yardi, MRI LRO integration, and OneSite Leasing and Rents from RealPage. Which one you choose will depend on pricing considerations, the system(s) you’re currently using, and the exact functionalities you require, among other factors.
Using rent optimization software as part of your property management process will allow you to simplify and streamline the entire process, driving higher revenue through the use of robust data and clear, comprehensive metrics. You will be able to assess factors including occupancy rates and marketing as well as rental rates throughout the entirety of the renter life cycle.
Your rent optimization software also enables you to create simple and seamless workflows, showing your team members exactly what they need to do, saving staff time, and ensuring consistency of process across the board.
Running Reports for Lease Rate Differentials
Whichever software system you’re using, you will need to run regular reports to assess your loss to lease rates and optimize the rental rates you can charge for your units. The exact report names we use in this section refer to the MRI software package, but all real estate software packages have similar equivalents.
Gain to lease or loss to lease discrepancies can be found by generating the Monthly Reconciliation and Residential Management (RM)/Unit List reports. By comparing the Current Month Optimum and Gross Potential (i.e., Current Month Potential) amounts in these reports, you will be able to assess the discrepancy between how much you could be making and how much you are actually making.
In MRI, the Monthly Reconciliation report pulls the Current Month Optimum and Gross Potential amounts from the Unpaid (UNPD) table for the time period you specify. The RM/Unit List pulls from the UNIT table, which contains all units set up for RM properties and includes information such as model, unit status, square footage, unit type, appliances, optimum and base rent amounts, alternate vacancy codes, make ready dates, and so on. These reports show only current values and are not period-driven.
If the Optimum and Potential rent amounts agree with each other, no further query is needed. If there is a discrepancy, further review will be required to determine what changes should be made.
How We Can Help
If you are looking to improve your rent optimization for better income potential, our experienced and knowledgeable team can assist you.
Whether you require one-time assistance with software implementation and training for your lease rent optimizer, or across-the-board support in the long term, we can tailor a support package to meet your needs.
Get in touch with a friendly REdirect team member today and we will be pleased to have a chat about how we can help you set yourself up for market-rate success.