Wilhoit Investment Network
TOPIC: It’s geometry day at Apartment Academy! The legendary John Wilhoit joins us to talk about the Rent Roll Triangle, a sensitivity analysis that anyone can use to assess rental property income. Class is in session!
John Wilhoit is a consulting asset manager and the author of multiple books on property management and real estate, including the “Rent Roll Triangle.” John is an incredibly valuable resource, especially for smaller operators in the trenches trying to maximize their investment dollar every day.
John developed the concept of the “Rent Roll Triangle” as an offshoot from his first successful book, “How To Read A Rent Roll.” That book is focused on rent roll analysis and how to do it from any level, whether you have supercomputers or just the back of an envelope. You really have to dive into the rent roll to understand multifamily assets.
What is the Rent Roll Triangle?
What the “Rent Roll Triangle” does is segregate the different types of rents. The three pillars are the three types of rent that are connected to any property. Those are gross potential rent, stated lease rents, which is the actual amount of rents that should be collected per lease, and the actual amount collected, which is collections.
The first rent is gross potential. Gross potential rent represents the highest probable rent that can be obtained by a particular unit, not by a particular property. Once you can do it at the unit level, that allows you to build on that for the different types of units that you have within your portfolio or at that property.
Ideally, you’ll hit gross potential every day. But it’s never the same from one day to the next, because the inventory changes regularly, as does the competition. With all of those moving pieces, gross potential rent is essentially a moving target.
Also, there’s always a gap. And it doesn’t mean that there’s always a gap amongst all three, but there’s always a gap between existing leases and gross potential. If your leases are one, two, or three years old, then some gross potential is getting away. And even at the best of properties, you’ll seldom see 100% collections.
Some people think that high turnover is good because you get to raise rents all the time. Turnover cost is severe, however, and it’s not getting any better. Expenses and costs are not getting any lower, which means our efficiency has to improve to operate properties at a high level.
Why is the Calculating Rent Types Important?
This calculation has value because once you ascertain or determine what those differentials are, then you know where to spend your time to remedy them. And in contrast, if you don’t know where those differentials are, you’re just guessing.
There’s an outlier though, that affects all of those. That’s the term of the lease. The shorter the term of a lease is, the lower your property’s “Rent Roll Triangle” score will be. Conversely, the longer the term of the lease is, the greater your property’s “Rent Roll Triangle” score will be. The “Rent Roll Triangle” really allows you to determine, in short order, where you should focus staff time for purposes of gaining more rental income.
This year, on johnwilhoit.com, there’s a tool that will do the Rent Roll Triangle calculation for you. And there’s also a methodology for printing it out once you get the calculation.