In-Place Rent
Rental income plays a major role in the financial health and operations of every investment property. Specifically, each property’s rental rate impacts the property’s value. This means that if the rent per sq. ft. is lower than what it could be, then property could potentially be a value-add opportunity. To identify a value-add opportunity, real estate investors must understand the difference between in-place rent and market rent.
What is In-Place Rent?
In-place rent (also known as current rent) is the actual rental rate that the tenant pays as written in the lease agreement between the lessor (the landlord) and the lessee (the tenant). In return for paying the rent, the tenant (which can be a business or an individual) can occupy space in the property as determined in the lease.
How do Investors Determine What the Rent Should Be?
When real estate investors conduct their due diligence on a potential value-add deal, one of the things they analyze is whether the in-place rent is less than the market rent. As you may have guessed, the market rent is the rental rate that the real estate market charges given the property’s location, classification, and amenities. In other words, investors compare the current rents to those of similar properties in the area.
How Does In-Place Rent Affect Occupancy?
The in-place rental rate is an important factor in attracting tenants to sign lease agreements. Offering an in-place rent below market rent is likelier to attract more tenants than charging above market rent.
How Does In-Place Rent Affect Property Value?
However, if your current rents are below market rent, it could decrease the property value. This is because the property’s net operating income (the difference between a property’s annual revenues and operating expenses) is below its maximum potential. Therefore, the goal for many value-add investors is to find properties that have current rents significantly below the market rent. If the investor can increase both the occupancy and the current rents to the market rent (assuming it is below market rent), they can significantly increase the value of the property. Thus, they garner profits from the increased net operating income and the exit sale.
Before founding 3E in 2016, Managing Member Eric Bergin was Director at Rockpoint Group, where he was responsible for for the Finance Group, as well as acquisitions, asset management, and investor reporting activities.