Gross Potential Rent
Gross potential rent, or GPR, is a metric that reflects the amount of rental income a commercial property generates at 100% occupancy.
What Is Gross Potential Rent?
Investors looking to acquire a self-storage facility — or any commercial real estate property — may find it extremely beneficial to evaluate an asset’s gross potential rent. Gross potential rent, or GPR, is a metric that reflects the amount of rental income a commercial property generates at 100% occupancy. GPR is often confused with gross potential income, or GPI, but — unlike GPI — gross potential rent doesn’t include other, non-rental sources of income, such as paid parking spaces or vending machines.
Calculating Gross Potential Rent
The first thing an investor should know about the gross potential rent measurement is that it is dependent on a couple of assumptions. The GPR metric assumes that the asset is at full occupancy, and each tenant is paying their full rent price with no issue. Gross potential rent calculations traditionally also utilize market rent — which equates to the asking rent price of comparable assets in the same market. That said, technically speaking, any value can be plugged into the formula in place of market rent, if only to give investors an idea of the potential rental income for each given value.
On paper, calculating gross potential rent is pretty simple. In the most basic of forms, GPR is found by taking the market rent and multiplying it by the total number of units the asset has, provided rent is the same for all units. The resulting figure represents the asset’s monthly GPR, which can then be multiplied by 12 to find the asset’s annual GPR. To better illustrate the gross potential rent calculation, take the following example: an asset with 50 units residing in a market with a market rent of $350 per month would have a monthly GPR of $17,500 ($350 x 50 units), and an annual GPR of $210,000 ($17,500 x 12).
Getting a more accurate calculation of an asset’s GPR involves a little more work, as many assets rent different units out at varying costs. In the case of a self-storage asset, there are many factors — square footage, climate control, vehicle storage, etc. — that typically dictate what the market rent for each is.
In cases such as these, a market rent can be assigned for each type of unit rather than the one-size-fits-all approach of the standard formula. For a better idea of how this works, consider a self-storage facility with 150 units (and their market rent prices) broken down as follows:
50 small units (market rent of $100 per month)
35 medium units (market rent of $150 per month)
35 medium climate-controlled units (market rent of $200 per month)
30 large units (market rent of $250 per month)
50 units x $100 = $5,000
35 units x $150 = $5,250
35 units x $200 = $7,000
30 units x $250 = $7,500
What is gross potential rent?
Gross potential rent, often referred to as simply GPR, represents the maximum amount of rental income that an owner or investor can expect to generate from a property over a specific time period. Unlike the data from a rent roll, which compiles all active rents from a property (among other things), the gross potential rent calculation assumes 100% occupancy. GPR is calculated by multiplying the market rent by the total number of units.
To better illustrate gross potential rent, imagine a property with 15 units. Each of these units has a market rent of $4,000 a month. This property would have a monthly GPR of $60,000.
$4,000 x 15 = $60,000
GPR can be calculated for longer periods through the additional step of accounting for the number of months the GPR is desired to represent. For example, we now know this property has a monthly GPR of $60,000, so its gross potential rent over a three-month period would be $180,000 ($60,000 x 3). To determine market rent price, an investor should look at comparable properties in the same market in order to formulate an accurate estimate. Comparing similar properties in this manner is doubly useful, as understanding relevant market data also helps an investor more accurately project an asset’s profitability.
How is gross potential rent calculated?
Gross potential rent, often referred to as simply GPR, represents the maximum amount of rental income that an owner or investor can expect to generate from a property over a specific time period. GPR is calculated by multiplying the market rent by the total number of units. To better illustrate gross potential rent, imagine a property with 15 units. Each of these units has a market rent of $4,000 a month. This property would have a _monthly_ GPR of $60,000. To determine market rent price, an investor should look at comparable properties in the same market in order to formulate an accurate estimate. Comparing similar properties in this manner is doubly useful, as understanding relevant market data also helps an investor more accurately project an asset’s profitability.
GPR can be calculated for longer periods through the additional step of accounting for the number of months the GPR is desired to represent. For example, we now know this property has a monthly GPR of $60,000, so its gross potential rent over a three-month period would be $180,000 ($60,000 x 3).
Sources: Effective Gross Income and What Is Gross Potential Rent?
What factors influence gross potential rent?
Gross potential rent (GPR) is a financial metric that measures the potential rental income of a property. It is calculated by multiplying the number of units in a property by the average market rent for similar units in the area. Factors that influence GPR include the number of units in the property, the average market rent for similar units in the area, and the occupancy rate of the property.
In addition, GPR is often confused with gross potential income (GPI), which also incorporates potential income from parking fees, vending machines, and other ancillary income sources.
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What are the benefits of understanding gross potential rent?
Understanding gross potential rent (GPR) can be beneficial for investors in a few ways. First, GPR helps investors understand the maximum amount of rental income they can expect to generate from a property. This is especially useful when comparing properties in the same market, as it allows investors to more accurately project an asset’s profitability. Additionally, GPR can be used to calculate the total amount of rental income over a longer period of time, such as a three-month period. This can be done by multiplying the market rent by the total number of units and then multiplying that number by the number of months the GPR is desired to represent.
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What are the risks associated with gross potential rent?
The main risk associated with gross potential rent is that it is based on market rent, which can be difficult to predict. Market rent can fluctuate due to changes in the local economy, changes in the rental market, and other factors. Additionally, GPR does not take into account potential vacancies or rental payment issues, which can significantly reduce a landlord's rental income. For more information, please see this article.
How can investors use gross potential rent to their advantage?
Investors can use gross potential rent to their advantage by using it to accurately project an asset's profitability. By comparing similar properties in the same market, investors can determine the market rent price and calculate the gross potential rent for a specific time period. This can help investors determine the maximum amount of rental income they can expect to generate from a property over a specific time period. For example, if a property has 15 units with a market rent of $4,000 a month, the property would have a monthly GPR of $60,000. To determine the GPR over a three-month period, the investor would multiply the monthly GPR by 3, resulting in a GPR of $180,000.
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Given this information, the calculation would have four steps:
Add up the values to calculate the total GPR of the property of $24,750 per month.
How GPR Is Used in Self Storage Finance
While the calculation of GPR is typically done to give an investor an idea of how profitable a commercial asset can be under the right circumstances, in truth, it can be a much more valuable tool. As we’ve mentioned above, the formula doesn’t strictly have to be calculated using market rent. Instead, investors can utilize the same formula to assess the effects of different rent asks on overall profitability.
Additionally, when more details are known about a market, the GPR measurement can be utilized for even greater insights. For example, looking at occupancy trends can add further accuracy to a GPR calculation. If the average occupancy for comparables in the market hovers around 85%, then the calculation can be modified to account for this occupancy rate, leading to a much more realistic measure of income potential for the asset in question.