Multifamily Rent Roll: Analyzing Move-In & Lease Expiration Dates
Extracting move-in, lease start, and lease expiration dates from the rent roll gives you access to both historical leasing trends and future hazards.
Move-ins can give you historical insights like:
General property rent trend
Floorplan leasing trends
Strongest/Weakest leasing months
Lease expirations can provide you with potential future pitfalls like :
Unit turn exposure during the winter
The number of leases expiring in the coming months
The monetary value of the leases expiring in the coming months
Tutorial Contents
After you input the essential rent roll data into the proforma (Part I of the rent roll analysis series), it's time to begin considering the time-sensitive data.
Momentum is real in multifamily leasing, and you want to understand the recent trends. Most rent rolls will exhibit both move-in and lease start information. The difference between the two is the following.
Move-In: When the tenant moves into the building
Lease Start: When the tenant's lease starts
A tenant in their first one-year lease will have the same move-in and lease start date.
A tenant who moved into the property five years ago and decided to renew their annual lease will have a move-in date from five years ago and a lease start as the current date.
While you can analyze both dates and seek out pertinent trends, I have always gravitated toward the move-ins for one big reason:
Move-ins are a better barometer of the true market rents.
How is a prospective tenant viewing the property from the outside, and what are they willing to pay to live there? The lease start date includes renewal leasing data, which isn’t the best indicator of market rents due to tenants being conditioned to their historical rental rate.
Move-ins offer a better indication of the direction of the rental rates of the overall property—a fresh perspective on what a unit is worth.
I knew an investment group that would look at all of the recent move-ins for the last two or three months during peak leasing season. From there, they'd calculate the rent per square foot on these units, extrapolate that over the entire rent roll, and use that rental growth rate (or rental decrease) in their Year 1 proforma underwriting.
Note: I tend to focus on the past 12 months of move-in data, and as a rule of thumb, about 50% of the residents will have a move-in within the last calendar year.
It's also important to look at which prospective tenants better receive floorplans. If you can see in the T12 P&L statement that gross rents have increased 4% year-over-year, you may be tempted to increase the Year 1 rent by something similar.
However, if you're willing to extract move-in dates, you could organize the data by unit type to see how each floor plan has fared.
If the smaller units’ rental rates have increased more than the larger floor plans, you should consider that in your underwriting. That's why in Tactica's Value-Add Model, I allow you to create baseline rent growth assumptions for each floorplan.
You can also use this historical trend data to prepare for the months that have been historically stronger or weaker. Suppose May and June have been the best leasing months at the property, and January and February are the worst. In that case, you'd want to structure future leases to avoid expirations during the cold months and instead finish their term in spring and summer.
Staggering lease expirations is a common practice by sophisticated management groups to avoid lease expirations in the worst months. Unfortunately, in most cold weather climates, depressed rents during the winter are a common theme across all properties in the submarket. Avoiding these months altogether is a wise course of action that can help bolster the property and avoid higher vacancy, loss-to-lease, or dreaded rental concessions.
If you plan to buy a property in a cold-weather climate, you want leases to stay active during winter. The renter pool will typically be much more shallow during cold months due to moving exponentially more challenging, and families will generally avoid it due to kids' school schedules.
Creating a lease expiration schedule can help you confirm that the bulk of leases will expire in the spring and summer months (even late fall), which will be easier to backfill if the current tenants don't renew their leases.
If you are interested in a 120-unit property, 100% occupied, in a cold-weather climate, you'd want those expirations to fall somewhat equally over prime leasing season. Something like this:
There’s a nice ramp-up of expirations from spring through summer, but no month has more than 15% over the total expiration exposure (August has 18/120 expirations).
You'd want to avoid having a large contingent of leases expiring simultaneously, especially when there is softness in the general leasing market.
Fifteen leases expiring in February could be problematic, and 31 leases in June account for 26% of the entire rent roll exposure! Ideally, there’d be more expirations in April, May, August, and September.
I talked about leases staggering earlier, and generally, property managers will set lease terms to avoid the build-up of a considerable quantity of leases expiring all at once.
It's also important to look at the value of the leases expiring. Even though the lease expirations are evenly allocated over prime leasing months, the value of these leases is quite different. Larger, more expensive units expire in May, so the potential revenue loss is much more significant.
Do you want to build charts from the rent roll as I did above for your rent roll analysis? Check out the video below.
Summarizing Move-Ins & Lease Expirations
I think of a rent roll as a snapshot of property performance. It may have been different yesterday and could change tomorrow, but today, it gives you the most detailed depiction of the property's financial health.
You can unlock much more value if you are willing to extract and analyze the following:
Move-Ins
Lease Starts
Lease Expirations
Leasing momentum and unearthing future pitfalls are readily available if you're willing to extract and analyze the time-sensitive data.
If you haven't yet, check out our article, "Deciphering a Rent Roll with Lease Charges: Multifamily Investment." This article is Part I of the rent roll series.
Part III (final chapter) analyzes rental extracting concession data and ancillary income items.