What is the difference between market rent vs actual rent in multifamily?
Market Rent vs Actual Rent
Market rent represents the potential rental income based on current market conditions and comparable properties, and is used for evaluating potential revenue and setting future rents. Actual rent is the rent currently being paid by tenants, reflecting the property's current income and financial performance. While market rent can fluctuate with market changes, actual rent is fixed during the lease term and is used in cash flow analysis.
Market Rent Overview
Market rent is the amount of rent that could potentially be charged for a property or unit, based on current market conditions. It is the average rent that similar units in the same area are currently renting for, and is used as a benchmark to assess the potential revenue from a property. Investors and property managers use market rent to evaluate whether the current rents are competitive and to make decisions about rent adjustments. Market rent can fluctuate daily based on supply and demand in the local rental market, economic factors, and changes in the neighborhood or comparable properties.
Actual Rent Overview
Actual rent, also known as "contract rent," is the rent that is currently being paid by tenants. It is the actual income that a property is generating. This figure helps assess the current performance of the property. It reflects the actual income the property is generating, which forms the basis for cash flow analysis and determining a property's financial health. Actual rent tends to be more stable than market rent, as it is set by lease agreements and can only be changed at lease renewal or when new tenants move in.
Key Differences Between Actual Rent vs Market Rent
- Basis: Market rent is based on potential and comparability, while actual rent is based on current contractual agreements.
- Usage: Market rent is used for market analysis and setting future rent prices, while actual rent is used for calculating current income and financial performance.
- Variability: Market rent can change with market conditions, but actual rent is fixed for the duration of a lease agreement.
Understanding the difference between these two types of rent helps property managers and real estate investors make informed decisions about pricing, leasing strategies, and evaluating the performance of their multifamily properties.
