Loss to Lease in Apartments: Formula and Example
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Loss to lease is the difference between what a unit would rent for today (market rent) and what the current tenant pays under their lease, added up across the building. If market rent is $1,200 and a tenant pays $1,140, that unit has a $60 monthly loss to lease. It is called a loss because the owner is earning less than the market allows, and it is also called upside because rents can rise toward market as leases renew or turn over. Sponsors who raise money with DoorRaise are often asked how much of a deal's projected income depends on closing this gap.
This post defines loss to lease, shows the formula and a hypothetical example, and explains how to underwrite it without overpaying. It builds on our guide to economic vs. physical occupancy.
What is the formula?
For each occupied unit, subtract the rent in the lease from the market rent for that unit type. Add the results, then multiply by 12 for a year.
A common way to express it is as a percentage of gross potential rent (GPR): loss to lease divided by GPR. Define "market rent" before you compare two buildings, since sellers and sponsors set it differently. It should come from rent comps, not from asking rents alone.
A hypothetical example
This example is hypothetical, for illustration only. Take a 40-unit building where market rent is $1,200 a month and the average in-place rent is $1,140.
| Line | Amount |
|---|---|
| Gross potential rent at market (40 x $1,200 x 12) | $576,000 |
| Gap per unit | $60 a month |
| Loss to lease (40 x $60 x 12) | $28,800 a year |
| Loss to lease as a share of GPR | 5.0% |
If every lease reset to market tomorrow, income would rise $28,800 a year. That will not happen. Leases end over a year or more, tenants may leave, and a market increase may be larger than the tenants will accept.
Why can the gap not be counted as certain income?
- Market rent can fall. If market rent drops 3% to $1,164, the gap shrinks to $24 a unit, or $11,520 a year, without any action by the owner.
- Renewals are capped in some places. Some cities and states limit rent increases, see rent control laws.
- Pushing rents can raise turnover. Each turnover costs vacancy, cleaning and repairs, which can erase the gain on a unit.
- The seller may have set the market rent high. Check it against comps.
Why should you not pay full price for it?
A buyer who capitalizes the gap into the price pays the seller for income the buyer must still earn. In the example, $28,800 at a 6.5% cap rate implies about $443,000 of value. If only half of the gap closes in the first two years, or none of it in a weak market, the price was too high. Underwrite the gain gradually and include a case where it closes slowly or not at all. Our underwriting basics and value-add business plan guides show where this assumption sits in a model.
How do you check it in the documents?
- Pull the rent roll and list market rent, in-place rent and lease end date for each unit.
- Sort by lease end date to see how much of the gap can reset in the first 12 months.
- Compare in-place rents with recent new-lease rents on the T-12 and in the leasing records. See the rent roll and T-12 guide.
- Ask whether the gap comes from long-term tenants, from a former owner's discounts or from old concessions.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units under Rule 506(b) or 506(c). It prepares the offering documents from the sponsor's inputs, coordinates escrow with Enterprise Bank & Trust, collects investor funds by wire only and handles filings. The deal page lets you explain your rent assumptions to investors, and the investor updates feature reports actual results after closing. DoorRaise does not verify a seller's or a sponsor's numbers; sponsors must check what they present.
DoorRaise is for apartment buildings with 5 or more units, and sponsors can launch their deal here. Setup is $1,500 (non-refundable), and the administration fee is $5,000 a year from closing.
To get started, create your sponsor page or see the fees.
FAQ
What is loss to lease in apartments?
It is the gap between a unit's market rent and the rent in its current lease, summed across occupied units.
How do you calculate loss to lease?
Subtract each unit's lease rent from its market rent, add the results and multiply by 12 for the annual figure. Divide by gross potential rent for a percentage.
Is loss to lease good or bad?
It is both. It means the owner earns less than the market allows, which is upside if the gap can be closed and a risk if the market weakens.
Is loss to lease the same as vacancy?
No. Vacancy is an empty unit. Loss to lease is on a rented unit paying below market.
How fast can loss to lease be recovered?
It depends on lease end dates, tenant turnover, local rent rules and the market. Read the rent roll rather than trusting an assumption.
Sources
- Fannie Mae, Multifamily fixed-rate mortgage loans
- 17 CFR 240.10b-5, Employment of manipulative and deceptive devices
This article is general information, not legal, tax or investment advice. Talk to a securities attorney and a CPA about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.