The Rent Roll Triangle is a simple underwriting calculation to determine if the property has potential for a value add strategy.
John Wilhoit is an experienced asset manager. He takes us through how you can utilize the rent roll triangle so you can determine how the current income of a property compares to its potential.
What is the Rent Roll Triangle?
The rent roll triangle compares the collected rent to the gross potential rent to determine how the property is currently performing against its potential. Once calculated, you will know if there is an opportunity to increase the rents. If you are looking in a particular market, you can look at multiple properties to determine which property to submit a letter of intent on.
Numbers needed to calculate the Rent Roll Triangle:
- Gross Potential Rent
- Stated Leases
- Collected Rent
- Average Term of Lease
How to calculate the Rent Roll Triangle:
Divide: Annual Collected Rent / Annual Gross Potential Rent
Annual Collected Rent: $80,000
Annual Gross Potential Rent: $100,000
$80,000/$100,000 = 80%
The property is rented to 80% of its gross potential, or
there is a chance to increase rents by 20%.
From here, you will need to determine how significant of a value add is needed to raise the rent. Is it a simple matter of increasing the rents, paint, or do you need significant capital improvements? How long will it take to earn back the cost of the upgrades?
There is an endless number of calculations real estate investors can use when evaluating an investment property. I have found that experienced investors focus on a couple of measurements when investing.
Use the Rent Triangle to quickly determine the income potential of your next value add real estate purchase. Regardless if you are buying a duplex, apartment building or office building, this easy to use calculation will show you a property’s potential upside.
So, if you are looking for an easy calculation to determine if there is more underwriting needed, consider using the Rent Triangle.
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