Month: September 2020

Understanding Gross Potential Rent and Economic Vacancy

Gross Potential Rent (GPR) is the total number of income that a real estate investor can expect to receive from a purchased property based on “market rent.”

Lesson 1. GPR is based on “market rent” and not “proforma rent.” Don’t let sneaky broker or savvy sellers fool you with imaginary “proforma” rent numbers.

You need a seasoned property manager in the class of apartments that you are investing and rely on their data for market rents today… not market rents in the future. Even better if your property manager is Fannie or Freddie approved as both are the primary source of apartment financing in Fall 2020.

Lesson 2. GPR assumes 100% occupancy and that each tenants is paying 100% of their rent.

And every seasoned investor knows that nothing is ever 100% occupied and tenants never pay 100% of the rents due either due to concessions, late payments or loss to lease.

Economic vacancy can be caused by physical vacancy (empty units), bad debts (tenants not paying), concessions (giving first month rent to attract tenants), and/or loss to lease (rents paid being lower than market rents).

Lesson 3. To calculate Annual GPR, take the market rents times the total number of units * 12. For example, this Vallejo apartment has $1997/month market rents times 24 units * 12 or a Annual GPR of $575,136.

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