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maximizing rent

How to Maximize Rent with Two Core Functions

maximizing rent

by Laura Nero

 

Gross Potential Rent and an amenity-based pricing structure are both means to take a critical look at the rents you are charging. Broadly, Gross Potential Rent is a tool used to compare what you’re forecasted to earn in a fiscal year versus what the market might command. In Yardi, GPR is a report that can be run to quickly make this comparison, based on what you’ve entered into your system as “market rent.” Amenity-based pricing is strategy that starts from a “base rent” and adds amenities as a monthly charge, which may or may not be viewable to the renter. Here, we will take a look at the benefits of using both strategies in and outside of Yardi to maximize rent and your profit margin.

Gross Potential Rent

If you’ve ever purchased a property using debt or applied for a construction loan, you’re probably aware that your forecasted annual earnings from rent are a factor in the calculation of your debt coverage ratio and thus your maximum loan amount. Underwriters use a calculation that starts with your maximum possible rent multiplied by one minus the vacancy rate for that class of apartment building to approximate earnings in your first year of operations and then throughout the loan period given similar economic conditions. Maximum rent, or Gross Potential Rent (GPR) is an easy calculation: it’s simply unit rent per year multiplied by number of units. When calculating rental income per year, it’s also common to include an “escalator” that factors in an increase of (typically) two or three percent per year.

When setting unit rents for a property, determining the correct “market rate” for a unit can present many challenges. Set your rents too high, and you’ll likely be faced with a high vacancy rate. Rents that are too low may leave you unable to cover operating costs and debt-service payments. In the past few years in the United States, the rental market has been very favorable for owners, with low vacancy rates seen in markets across the country. However, within every market are smaller “subgroups” that further determine the position of a property and what rents can feasibly be charged—where the property is located, what amenities it offers, and the age of the property itself are examples of such factors that determine a property’s subgroup.

If you are considering constructing an apartment building, there are a number of additional calculations that must be made to determine its viability. Besides unit configuration, you’ll also want to consider rent per square footage and the designation of common areas, whether your building contains commercial space, and how to determine vacancy in year one versus year five.

Interpreting a GPR Report in Yardi

Gross Potential Rent is one of the many exportable reports in Yardi that can help you measure the financial performance of a property. You might use a GPR report to forecast earnings for the acquisition of a property that is similarly situated. It can also be used as an audit tool to help you determine if there are charge errors associated with individual units that are affecting your General Ledger.

GPR reports include several columns of information. Below are the column headings and how each column can be used in a routine audit.

  • Market Rent: Market Rent as determined by unit type; this is set up in Yardi on the back end, likely when the property information is initially entered into the system.
  • Potential Rent: The amount here should be what was entered as a recurring lease charge.
  • Loss/Gain to Lease: This column shows you the difference between Market Rent and Potential Rent. A loss or a gain (a loss will show up as a negative value whereas a gain will show up as a positive) typically means that lease charges have been entered incorrectly. A Loss to Lease means you are losing money on the unit – either not collecting enough rent or not collecting rent at all. A Gain to Lease means you are charging more than you should be.
  • Vacancy: This column shows what amount was lost due to the unit being vacant and is subtracted from the Potential Rent to get the Actual Rent being collected. It may show less than a full month’s rent if the unit was unoccupied for a partial month.
  • Actual Rent: This is the amount of rent charged according to the resident’s ledger, or, in other terms, the actual rent being collected.

A GPR report will include a separate line for units that are non-revenue-producing such as model units. It will also show Future Tenants—that is, tenants who have a future lease date entered into the system but have not moved in yet; their projected rent will be added to the total potential rent. The last, and perhaps most important, line of a GPR report shows Total Forecasted Rent for the Accounting Period. It’s recommended that you take a look at this report regularly to make sure all of your charges have been set up correctly in the system.

Gross Potential Rent and Gross Rent: Affordable Properties

If you are considering either acquiring a property that has received public financing or pursuing the construction of a new building that will use public financing, you’ll have to consider a predetermined maximum rent when forecasting income and/or setting unit rent. The calculation of maximum rent is based on the Department of Housing and Urban Development’s predetermined metropolitan statistical areas (MSA). The levels for Low Income (80%) and Very Low Income (50%) are calculated based on 80% and 50% of the median pre-tax household income for an MSA. That number is then multiplied by 0.3 to get the amount that should be contributed to a household’s housing costs (including utilities). Gross rent is then set by bedroom size and is imputed based on 1.5 people per bedroom.

Maximum rent is a ceiling; you certainly can charge less than maximum rent and may decide to do so if certain factors, like the location of the property, dictate that you should in order to avoid a high vacancy rate. Charge more than maximum rent, and you’ll likely be faced with fines (or even recapture of tax credits, in some extreme cases).  When setting rents at an affordable property, you must include a Utility Allowance. This amount, like maximum rent, is specific to your area and is predetermined. Gross rent is rent plus the utility allowance plus any additional required charges.

Required is emphasized above to illustrate the point that property amenities are not necessarily required charges. That is, you may still charge the maximum gross rent for a two-bedroom unit, and tenants may choose to add additional charges to their monthly bill. A common example of this is parking; many affordable properties offer tenants an option to pay an additional, say, $100 or $200 per month for a dedicated parking space or garage. This additional charge is not factored into the calculation of the household’s gross rent since it is not a required charge. Though the example used here is fairly straightforward, check with your monitoring agency to ensure that your interpretation of “optional charge” matches theirs.

What’s the Value of an Amenity?

Amenities are more than a “perk;” they can directly affect a property’s vacancy rate and financial performance and can help you to maximize rent. Data-driven decisions to add amenities and/or to set a schedule of amenity-based pricing can help you further maximize potential rental income. In a less-competitive market with a high vacancy rate, amenities can set your property apart from others on the market. Conversely, in a tight market, amenities may not be a top-of-mind consideration of a potential renter with few available options. Renter behavior certainly can’t always be predicted, but to what extent you can assign a dollar value to an amenity will be valuable. The amenities you choose to offer should be informed by the target market and location for your property, i.e., in a building designed for seniors, a second-story loft space might not command a higher per-month rent. Similarly, the amount you may be able to charge for a parking space may be limited by a property’s location in an area with abundant on- and off-street parking. Amenities should also have general appeal—if it’s accessible by everyone, you’ll want to make sure that a potential renter is excited about the amenity and therefore willing to pay the additional cost per month so you can maximize rent.

Amenities fall into two categories: unit-based and building- or property-based. Building-based amenities are accessible to many or all your tenants, whereas unit-based amenities are specific to the tenant’s own space (think in-unit washers and dryers, hardwood floors, balconies, etc.). Unit-based amenities are inherently more “trackable”—you can easily assign a value per month to be added to a base rent amount. Determining the value of a building/property-based amenity to a potential renter is not an exact science. You may want to compare what you’re considering offering as an amenity or unit upgrade to other similar properties in your market that offer such amenities. Yardi’s customizable reports are useful here to build your own “study” based on what’s in your portfolio so you can maximize rent.

In Yardi, you have the option to assign a charge type to an amenity. Certain amenities—like parking, are already integrated into Yardi, and charging can easily be managed by property-site staff. On the other hand, to track unit-based amenities and charge different rents based on included amenities can be difficult, and it is recommended to designate unit types on the back end of the system; this will make reporting on and gathering of data on amenities much easier and ensure fewer charge errors made by site staff. Once unit types have been designated based on an individual amenity, you’ll be able to quickly view vacancy patterns for those units and compare these types of metrics across unit types in your system.

Given the complexity of amenity-based pricing, you will want to use whatever data is available to you to guide your decision to offer an amenity to your renters. Amenities have the potential to increase value to a prospective renter, therefore allowing you to increase rents.

Maximize Rent with Yardi Voyager

We hope that the examination of these two methods, amenity-based pricing and Gross Potential Rent reporting, prompts you to take a different look at the way rent can be structured. A GPR Report is a great way to look at your existing properties in depth to ensure there aren’t any accounting errors in the system but can also be used to look at how your rents throughout the year compare to market rent. An amenity-based pricing structure, and the advantages of it, should especially be considered if you are planning renovations or a new construction project.

Need help with implementing the strategies discussed above? For more information on how NDC’s Yardi Experts can help you maximize rent and make the most of Yardi, call us at 404.590.8547, or email us at info@ndconsultingllc.com.