Loss to lease is an opinion wearing the clothes of a number

A deal summary shows current rents averaging $1,250 and market rents averaging $1,450. The difference, multiplied across the units, becomes the story. Two hundred dollars a unit of upside, sitting there, waiting.

That gap is loss to lease, and half of it is an estimate made by the person selling you the idea.

Current rent is a fact. Every lease is signed and the rent roll lists them. Market rent is a judgment about what a unit would achieve today if it were leased fresh. Reasonable people produce different figures, and the figure chosen directly determines how attractive the deal appears.

The arithmetic shows why the temptation exists. This is an illustration, not a real property. Two hundred units with a $200 monthly gap produce $480,000 of annual upside. At a six percent cap rate, capturing all of it corresponds to $8,000,000 of value. Move the market rent assumption by $50 a unit, a change almost nobody would challenge, and the implied value moves by $2,000,000.

There is a legitimate version of this. Leases signed eighteen months ago in a rising market genuinely sit below current pricing. As those leases expire, rents reset upward with no capital spent. That is real, and it is one of the better reasons to buy a property.

There is also a version where market rent means what a fully renovated unit might achieve in a market that has not been tested at that price, compared against current unrenovated rents. That comparison is not a gap. It is two different products.

Three things separate the versions. Whether the market rent figure comes from leases actually signed at the property in the last ninety days, or from a comparison to other buildings. Whether those recent leases were signed with concessions, which would mean the effective rent is lower than the quoted one. And what share of leases expire during the hold, since a gap that cannot be captured until year six does not help a five year plan.

That third point is regularly overlooked. A twenty percent loss to lease with leases rolling evenly means capturing it takes a full year at best. With annual leases and normal renewal behaviour, some tenants renew below market anyway, because pushing every renewal to market is how turnover and bad debt rise.

Ask for the last ninety days of signed leases at the property, with concessions shown, and compare that to the market rent column. Ask what share of the gap the underwriting assumes is captured, and by when. Ask what renewal rate that assumes.

A gap on paper is not income until somebody signs.

When you last saw a loss to lease figure, did you find out where the market rent number came from?