Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing what is gain to lease.
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In episode SS149, we spoke about lost to lease. In this episode, we will discuss what is gain to lease. Gain to lease is when a property’s rental income is above market rates, owner is actually earning more than the unit or the property’s gross potential rent. Of course, this is a great situation, but is it important to verify if your estimate of market rents is accurate? It’s typical for most properties to have a lost lease at some level. Usually the longer an owner has owned a property, the larger the lost lease is. This is especially true with mom and pop landlords who might have purchased their property 10 plus years ago and their debt service is low, and these owners would rather have fewer hassles than get every dollar out of their property. Now, if you’re selling a property with an actual gain to lease, a savvy investor might spot this and it might decrease their interest. However, with inflation and the rising costs and expenses of properties today, the gain to lease might not be a factor for very long.
Sometimes you’ll see multifamily properties for sale where the owner has dramatically increased their rent on a small portion of units in order to show a buyer the property’s potential. Now, I saw this before with a 60 unit property with no recent renovations, uh, that had four units that had been rented for $1,800 per month, while the rest of the building was rented at about 1300 to 1400 per month. And we reviewed it and never put an offer because the owner wanted it way too much. And they were trying to show that the market rent was not 1400, but 1800 were. In all actuality, they had a gain to lease. The other units would not have rented for 1800 without considerable investment. They probably spent months trying to rent those four units at $1,800 and most likely rented them to people moving into Florida who did not know the neighborhood or the market rent, and who’d most likely not renew the release at the end of it.
When I self-managed properties, my first rental properties in, uh, 2006 to 2012, I remember a few times when I actually had a gain to lease it happened, uh, when I would price one of my units above market rent, not really knowing that, and I rented it. And then a year later when that tenant wanted to move out and I went to re-rent it, I found it very difficult and ultimately had a lower it to a lower rental rate than the previous year’s rent, not the end of the world. And we were in a low inflationary time. So it wasn’t a requirement to keep increasing rent dramatically to keep up with expenses, but not something you really want to do. Another personal example is in my first two years of being a landlord, I rented to all college students. And after those two years as I started renting to more and more regular people, the rent I was receiving from regular people was less than that from college students.
So for those couple years, I unknowingly had a gain to lease. If you’re preparing your multi-family property for sale, you want to spend a year or so getting your rent as close to or even over market rate in order to maximize its value and hopefully maximize the sale price. Just make sure that when you’re purchasing property, you know what the actual market rents are. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show [email protected]. And if you’re interested in actively investing in real estate, please check out our courses and mentoring [email protected]. That is syndication superstars.com, and look forward to two more episodes next week. See you then.
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.
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