The accounting world, and specifically multifamily, self-storage, hotel, and car wash accounting, tend to use words or phrases that can be tricky to remember. This article focuses on defining common revenue-related accounting terms. If you know a term, skip to the next one.
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. GPR is commonly seen in multifamily or self-storage properties.
Effective Gross Revenue – The total amount of revenue a property generated for a period of time, typically measured on a monthly or annual basis.
RevPAR – This is a hotel-specific term that breaks down revenue per available room. RevPAR is calculated by multiplying a hotel’s average daily room rate by its occupancy rate. RevPAR is also calculated by dividing total room revenue by the total number of rooms available in the period being measured.
Sales – In the car wash industry, revenue is typically referred to as sales. You will see one-time sales, which occur when a customer decides to get a single-use car wash.
Monthly Recurring Revenue – In the car wash industry, you have membership sales that automatically get billed, so as you build your membership base, you collect monthly recurring revenue.
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 – This refers to the incentives properties use to maintain/gain occupancy or help the property operate. Common concessions are things like a one-time move-in special (i.e., $500 off first month’s rent), waiving of application fees, and a discount to a live-in courtesy police officer (i.e., a ten percent rent discount per month). A common non-revenue item is having a staged model unit to show prospective residents.
Bad Debt – 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 (if a property has or offers the services) are 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 – 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 and daily pricing:
Fixed Market Rent – Let’s say you buy a property and a two-bedroom unit in the area should rent for $1,000 per month. You’d set your two-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 two-bedroom that rents for $900 that you have to honor for ten 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 is in the winter months when people tend to move less and your property might have more vacancy than you want, so you rent a two-bedroom unit for $900. This would be a $100 loss to lease because your two-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 a two-bedroom is renting for $1,000 today and the seller has an old lease of $900, then you have a $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 the lease is 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.
