The accounting world and specifically multifamily accounting tend to use words or phrases that can be tricky to remember. One way to make sense of the terms is to think about them as if you are a resident renting an apartment and how a specific term can apply to one resident or one lease. This article focuses on defining the common revenue related accounting terms…
Gross Potential Rent (GPR) – The total amount of revenue a property can generate. The math is 100% of your units multiplied by market rent per unit.
Vacancy Loss – Properties are not typically 100% occupied, so vacancy loss is the line item to track what percentage of units are not occupied and not generating rental revenue.
Concessions and Non-Revenue – Tracks the incentives given away to maintain/gain occupancy or help the property operate. Common concessions are one time move-in specials (i.e. $500 off first month’s rent), waiving of application fees, and a discount to a live-in courtesy police officer (i.e. 10% rent discount per month). A common non-revenue item is having a staged model unit to show prospective residents.
Bad Debt – Tracks the dollar amount of rent that has not been paid by residents who are occupying a unit. The property manager works with the resident to collect monies owed and at times may get a court judgment for monies owed if eviction occurs.
Other Income – These are fees that are charged in addition to rent. Common other income fees include admin fees, application fees, late charges, pet rent, reserved parking fees, transfer fees, water/sewer rebills, internet/cable, trash rebill, pest control fee, renter insurance fee, and garage fee.
Loss to Lease – This is income lost based on existing in-place leases or new leases signed that are below your market rent price at the property. Loss to lease can be different based on the management software system approach for leasing. The two common software approaches are…
- Fixed
Market Rent: Let’s say you buy a property where a 2-bedroom unit at your
property (and in the area) rents for $1,000 per month. You’d set your 2-bedroom
rent to $1,000 in your software system. If the seller did not increase rental
rates, you may have a signed lease for a 2-bedroom that rents for $900 that you
have to honor for 10 more months. This would be a $100 per month loss to lease
until you can renew the resident’s lease to $1,000 or re-rent that unit for
$1,000. Another example… you are in the winter months when people tend to move
less, and your property has more vacancy than you want, so you rent a 2-bedroom
for $900. This would be a $100 loss to lease because your 2-bedroom rent is
still fixed in your software system at $1,000.
- Daily Pricing: If you set up your software system for daily pricing, then your market rent changes every day based on software algorithms that track comparable rents and supply/demand for units in the market. When using daily pricing the only time you have a loss to lease is when you take over a property and inherit leases from the seller. If your 2-bedroom is renting for $1,000 today and the seller has an old lease of $900, then you have $100 loss to lease. As you renew inherited leases or re-rent the units when residents move out you reduce and can eliminate the loss to lease over the first 12 months (if all leases are 12-months long). You don’t have scenarios like the second one above with a slower winter season because the software algorithm will automatically reduce market rent (or increase rent if possible) to keep up with the local market economics.
Be sure to keep this as a reference when you are evaluating your next investment opportunity.
