What are trended vs untrended expenses in real estate?
What Are Trended vs Untrended Expenses?
Trended rents in real estate account for historical rental trends and projected market growth, making them more dynamic and accurate during stable economic times, but potentially less so during major economic upheavals. Untrended rents, on the other hand, are based on current rental rates without considering projected increases, offering a more conservative and stable approach but potentially underestimating rental revenues. The choice between using trended or untrended rents depends on factors like market stability, investor risk tolerance, and the need for accurate long-term planning.
Trended Expenses/Rents:
- These reflect the historical trend or pattern of a property’s rental pricing, taking into account past rent changes to forecast future increases or decreases.
- They consider factors like inflation, market demand, and supply levels, which help in creating an accurate projection during stable economic times.
- However, trended rents might fall short in projecting accurate rental income during major economic upheavals, as they might not fully account for sudden rent decreases.
Untrended Expenses/Rents:
- Untrended rents do not consider historical patterns and typically remain static, changing only based on immediate factors like market demand or inflation.
- This approach is more conservative, as it does not anticipate market-driven increases in rent. It's a safer method in unstable economic times, but it generally results in an underestimation of rental revenues.
- However, like trended rents, untrended rents could also be inaccurate in certain scenarios, such as sustained market-level rental decreases.
In the context of yield on cost in real estate development, trended and untrended approaches also apply. The trended yield on cost includes property yield with financing and growth projections, considering factors like market trends and growth. In contrast, the untrended yield on cost looks at an asset’s return after purchasing and renovation expenses, without factoring in financing or major market growth trends.
The choice between trended and untrended rents depends on several factors, including market stability, the landlord's or investor's risk tolerance, and the need for accurate long-term planning. While trended rents offer a more dynamic and market-responsive approach, untrended rents provide stability and conservative estimates, especially in fluctuating market conditions.
