Revenue Methods Multi family

Comparing Net Effective Rent and Gross Potential Rent: Benefits and Drawbacks

In real estate, understanding revenue calculations is crucial for evaluating property performance. Two common methods are Net Effective Rent (NER) {'Effective' rent x # Unit x 12 Months} and Gross Potential Rent (GPR) {'Market' rent x # Unit x 12 Months} . Each has its own advantages and limitations, depending on the context of use.

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The difference between the two is majorly Rent concessions and loss to lease. Hence lets first understand what they are

What are Rent Concessions?

Rent concessions are temporary incentives offered by landlords or property managers to attract or retain tenants. These concessions can include discounts, free rent periods, waived fees, or added amenities.

Types of Rent Concessions

1. Free Rent: Offering one or more months of rent for free.

2. Reduced Rent: Temporary reductions in monthly rent payments.

3. Waived Fees: Eliminating move-in costs, pet fees, or security deposits.

4. Amenities: Free access to parking, gym memberships, or upgraded appliances

Rent Concession could be looked at as a reduction in the market rent for a temporary time. So say rather than the usual rent of $2000 per month rent from day one they say $1500 for first three months. 

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What is loss to lease? 

Loss to Lease is the difference between the market rent (the rent that could be charged based on current market conditions) and the actual rent being collected from tenants under existing lease agreements. It represents un-realized revenue due to rents being lower than the market rate.

Lost to lease could be looked at as a reduction in the market rent for the term of the lease. So say rather than the usual rent of $2000 per month rent they rented for say offer of $1800 per month for a 12 Month lease. 

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