As an investor, you must have a firm handle on both the current and potential value of a property.
One of the baseline metrics to examine is Loss to lease (LTL). It measures the difference between what tenants are currently paying in rent and what the market rate for those units could be.
When comparing multiple properties, LTL highlights where the greatest opportunities exist.
A high loss to lease suggests that rents are below market levels, so you may be able to raise rents after buying the multifamily real estate property.
If you can push current rents closer to market levels, you can improve cash flow, forcing appreciation and setting yourself up for a stronger exit.
On the other hand, a low LTL shows that existing rents are already close to market rates.
While this indicates less room for immediate rent growth, it also reflects that the property is performing in line with market expectations, so it’s not necessarily a bad thing — it may just offer steady income rather than value-add upside.
If you’re investing in multifamily real estate, it’s important to understand the loss to lease meaning and its impact on your profitability.
This guide has everything you must know to navigate LTL.
It’s also best to have a commercial real estate rent calculator on hand to help you run the numbers as you go.
What is loss to lease, and how does it happen?
Like we said, loss to lease is the difference between the rent that tenants are currently paying and what those units could earn at current market rates.
This gap often widens when owners lock in lower rents to retain tenants during lease renewals in effort to avoid turnover or downtime.
It can also result from concessions like ‘one month free’ deals that landlords sometimes use to quickly lease up vacant units.
These incentives may help boost occupancy, but they reduce the property’s effective rental income over time.
If you plug these numbers into a commercial real estate rent calculator, you’ll see how they drag down annual cash flow.
It’s important to note that loss to lease represents an opportunity cost rather than a direct financial loss in a sale.
You can turn that gap into measurable cash flow by raising rents to match market levels, repositioning underpriced units, or improving management and tenant quality.
In some cases, you may need to renovate outdated interiors and tighten lease terms or phase out concessions to capture that upside over time.
Calculating loss to lease
LTL is usually expressed as a percentage to make it easier to compare across different properties, including multifamily real estate.
Loss to lease formula
The formula for calculating LTL is:
(Market rental rate – Actual rental rate) ÷ Market rental rate = Loss to lease percentage
A positive percentage means that the actual rent is higher than market rent, suggesting that the property is already achieving peak or above-average rents.
A negative percentage means market rent is higher than actual rent, showing that tenants are paying less than they could be charged. This scenario indicates that there is potential to increase rental rates in the future.
Using a multifamily investment calculator can help you find the loss to lease of your property.
Calculating loss to lease for a multifamily property (an example)
Let’s look at a numbers-based scenario using a 10-unit multifamily property to better illustrate how loss to lease (LTL) happens:
Suppose a property owner is evaluating the loss to lease (LTL) for a 10-unit multifamily property. Market research shows that similar units in the area rent for $4,500 per month. So if all units are occupied for a year at market rates:
Market Rent per Unit = $4,500/month
Total Monthly Market Rent = $4,500 × 10 = $45,000
Annual Market Rent = $45,000 × 12 = $540,000
However, the property owner offers a concession — one free month of rent to tenants who sign a 12-month lease due to concerns about a possible economic downturn. This incentive quickly attracts tenants, bringing the occupancy rate to 100% as all 10 units are leased.
Although tenants pay $4,500/month on paper, the 1-month concession lowers their effective rent to:
Effective Monthly Rent per Unit = ($4,500 × 11) ÷ 12 = $4,125
Total Monthly Effective Rent = $4,125 × 10 = $41,250
Annual Effective Rent = $41,250 × 12 = $495,000
Finding the loss to lease percentage
To find the LTL percentage, divide the difference by market rent:
LTL (in dollars) = $540,000 – $495,000 = $45,000
LTL (%) = $45,000 ÷ $540,000 = 8.33%
So in this case, the owner traded $45,000 in potential rent to achieve full occupancy, resulting in an 8.33% loss to lease due to concessions.
5 ways to reduce loss to lease in multifamily real estate
The most direct way to reduce loss to lease is to increase rents. However, raising rents too aggressively can drive tenants away — especially those who have been paying below-market rates for years or who have incentives in their lease agreements. Investors often need to combine rent adjustments with property improvements and smarter leasing practices to keep tenants without compromising their profitability.
- Replace low-paying tenants with higher-paying tenants at market rents. This approach works best in markets with strong demand, where vacancies are quickly absorbed.
- Shorten your lease terms. With shorter contracts, you can adjust rental rates more frequently to reflect current market conditions.
- Offer value-based incentives. By adding amenities such as parking or bundled utilities, you can justify higher rents without pricing tenants out.
- Invest in property improvements. Upgrades to units or common areas can increase perceived value, making tenants more willing to pay market rates.
- Adjust for inflation. Regularly review rents and align them with inflationary trends to prevent the gap between actual and market rent from widening.
Challenges you may encounter when raising rents
Tenant turnover
Raising rents may cause existing tenants to leave, creating short-term vacancies and loss of income if the units aren’t filled quickly.
Lease timing
Rent adjustments can only happen when leases renew. However, this often occurs at different times throughout the year, making it difficult to implement rent increases across the entire property at once.
Changing market conditions
Because market rents fluctuate, hitting the ‘sweet spot’ can be tricky. While adjusting to economic shifts, make sure that you balance competitiveness with profitability to stay competitive.
How does loss to lease (LTL) differ from gain to lease (GTL)?
Loss to lease and gain to lease are two sides of the same concept, referring to the difference between market rent and actual rent.
- Loss to lease (LTL)
When market rent is higher than what tenants are currently paying, the property owner loses potential income. Tenants, however, benefit from paying below-market rates. - Gain to lease (GTL)
The property owner benefits in GTL because the actual rent is higher than the current market rate. This means tenants are paying more than the market would otherwise allow.
As a multifamily investor, it’s important to analyze both LTL and GTL.
A property with a large loss to lease may represent a buying opportunity if rents can be raised closer to market levels.
Conversely, if current rents are above market — creating a gain to lease — you may need to reduce those rents when leases renew.
That drop can shrink your income in the short term, even though it brings the property in line with market conditions.
What makes loss to lease important?
Loss to lease is a critical metric in multifamily investing because it directly impacts property valuation and investment strategy.
By identifying where rents fall short of market levels, you can find opportunities for value-add improvements and better pricing strategies to eventually gain higher returns.
When managed carefully, reducing LTL increases property income and also enhances its overall market value, making it an essential factor in capital allocation decisions.
Need financing?
If you’re looking for financing solutions in multifamily or commercial real estate, Private Capital Investors is here to help.
As a nationally recognized direct lender, we have assisted investors in securing more than $8.5 billion in funding over the past 25 years.
Our mission is to provide CRE investors like you with the capital necessary to move projects forward, whether across the US or internationally.
With a wide range of financing products and strong partnerships, we can tailor solutions to fit diverse investment strategies and unique requirements.
In addition to direct lending, many of our clients rely on us as trusted advisors.
How can we help you?
At Private Capital Investors, our focus is on understanding your capital needs and delivering financing solutions tailored to your situation. Our long-term success comes from consistently meeting the unique requirements of each client’s commercial real estate investment strategy.
Ready to explore your options? Call us today at 972-865-6206 or email us at info@privatecapitalinvestors.com to learn how we can help you fund your next commercial property investment.
