What Is Loss to Lease?
Loss to lease is the difference between a property's market rent and the rent tenants actually pay (in-place rent), expressed as a percentage of market rent. It quantifies how much revenue an owner leaves on the table due to below-market leases, making it a key metric in value-add underwriting.
// Loss to Lease Formula
LTL = (Market Rent - In-Place Rent) / Market Rent x 100
// Example
LTL = ($1,500 - $1,350) / $1,500 x 100 = 10%
Why Does Loss to Lease Matter for Underwriting?
Loss to lease is the single clearest signal of revenue upside in a multifamily deal. A property with 15% loss to lease has 15% of potential rental income sitting uncaptured, waiting for lease renewals or unit turns to unlock it.
Value-add investors specifically target properties with high loss to lease because closing that gap drives NOI growth without adding a single unit. When NOI grows, property value grows through cap rate compression math.
The Fannie Mae Multifamily Guide requires lenders to evaluate loss to lease when sizing loans on multifamily properties. Lenders view high loss to lease as both an opportunity (revenue upside) and a risk (the gap may reflect property condition issues).
How Do You Calculate Loss to Lease?
Start by comparing each unit's in-place rent to its market rent, then aggregate across the property. You need two data sources: the rent roll (for in-place rents) and a market rent survey or comp analysis (for market rents).
| Unit Type | Units | In-Place Rent | Market Rent | LTL % |
|---|---|---|---|---|
| 1BR / 1BA | 60 | $1,150 | $1,300 | 11.5% |
| 2BR / 2BA | 40 | $1,400 | $1,600 | 12.5% |
| Weighted Average | 11.9% | |||
Always calculate loss to lease at the unit-type level, not as a single property average. A blended number can mask situations where one unit type is at market while another is deeply below market.
What Is a Typical Loss to Lease by Strategy?
Loss to lease varies dramatically by investment strategy. Core properties trade near market rents. Value-add deals specifically target the gap.
| Strategy | Typical LTL Range | What It Signals |
|---|---|---|
| Core / Core-Plus | 2% to 5% | Well-managed, rents near market |
| Value-Add | 10% to 20% | Revenue upside through renovation and re-leasing |
| Opportunistic | 20% to 35%+ | Deep distress, major repositioning needed |
The National Multifamily Housing Council (NMHC) tracks rent growth trends across major markets. Rapid market rent increases in a submarket can push loss to lease higher even at well-managed properties, simply because existing leases were signed at lower rates.
What Is the Difference Between Loss to Lease and Gain to Lease?
Gain to lease occurs when in-place rents exceed market rents. This happens when a property signed leases during a market peak and rents have since declined, or when concessions in the market have effectively lowered achievable rents.
Gain to lease is a risk signal during underwriting. It means revenue will likely decrease at renewal because tenants can find cheaper alternatives. Lenders and appraisers may adjust effective gross income downward when gain to lease is present.
How Does Loss to Lease Connect to GPR and EGI?
Loss to lease sits between Gross Potential Rent (GPR) and Effective Gross Income (EGI) in the income waterfall. GPR assumes every unit is leased at market rent. Loss to lease reduces GPR to reflect what tenants actually pay. Then vacancy and concessions further reduce the number to reach EGI.
When building a pro forma, always model loss to lease as a separate line item rather than baking it into your rent assumptions. This makes your revenue bridge transparent and lets you show investors exactly where the upside comes from.