Key Takeaways
- Compare every unit's in-place rent to market comps—rents 10%+ below market indicate upside, rents at or above market signal risk.
- Use the higher of actual vacancy, submarket vacancy, or your minimum floor (5-10%) for underwriting.
- Only underwrite other income that is currently collected and verifiable in T-12 actuals—not seller projections.
- Revenue validation errors cascade through every metric, making this the most important validation step.
Revenue is the top line of every pro forma, and errors here cascade through every metric below. This lesson teaches you how to validate rents, vacancy, and other income assumptions against independent market data, ensuring your revenue projections are grounded in reality rather than seller optimism.
Validating In-Place Rents Against Market
Start by comparing every unit's in-place rent to current market rents for comparable units in the same submarket. Sources include Apartments.com, Zillow Rental Manager, RentRange, CoStar (for commercial), and local property management companies. If in-place rents are 10% or more below market, there is upside through lease renewals or unit turns—but you must discount this by execution time and turnover costs. If in-place rents are at or above market, there is no rent growth cushion and you face turnover risk when leases expire. Flag any unit paying significantly above market—that tenant may vacate soon, creating both vacancy and turnover expense.
Calibrating Vacancy Assumptions
Seller-provided vacancy rates often understate reality. A seller claiming 3% vacancy may be counting a non-paying tenant as occupied. Validate physical vacancy (actually empty units) and economic vacancy (occupied but not paying, or paying reduced rent due to concessions). Compare against submarket vacancy rates from CBRE, Marcus & Millichap, or local apartment association surveys. If the submarket vacancy rate is 7% and the seller claims 3%, either the property is exceptionally well-managed or the seller is using creative accounting. For underwriting purposes, use the higher of: (a) the property's trailing-12-month actual vacancy, (b) the submarket average vacancy, or (c) your minimum vacancy floor (typically 5% for strong markets, 7-10% for weaker markets).
Other Income: Real vs. Proforma'd
Other income (laundry, parking, pet fees, application fees, late fees) should be validated against the T-12 actuals, not the seller's pro forma projections. A common seller tactic is to pro forma other income items that are not yet implemented—"We could charge $50/month for parking but currently don't." Only underwrite other income that is currently being collected and can be verified in bank statements or the T-12. Potential new revenue streams belong in the upside scenario, not the base case. Verify that laundry income matches the lease contract with the laundry vendor, and that parking income matches the number of spaces actually being rented.
Guided Practice: Validating Revenue on a 16-Unit Acquisition
A seller presents a 16-unit property with $1,100/month average rent, 3% vacancy, and $4,800/year other income. You need to validate these assumptions.
- 1Pull 15 comparable rental listings within 1 mile on Apartments.com and Zillow—comparable 2BR/1BA units rent for $1,000-$1,050/month.
- 2The seller's $1,100 average is 5-10% above market. Two units have tenants on month-to-month at $1,200—flag these as turnover risk.
- 3Check submarket vacancy from Marcus & Millichap quarterly report: 6.2% for the submarket. The seller's 3% is optimistic.
- 4Underwrite at $1,050 average rent (market rate) and 6% vacancy (between property actual and submarket average).
- 5Verify other income: T-12 shows only $3,200 collected (laundry $2,400, late fees $800). The $4,800 figure includes $1,600 of projected parking fees not yet implemented.
- 6Underwrite other income at $3,200 (actual). Result: GPR drops from $211,200 to $201,600; EGI drops from $208,864 to $192,704—an 8% reduction from seller projections.
Key Takeaways
- ✓Compare every unit's in-place rent to market comps—rents 10%+ below market indicate upside, rents at or above market signal risk.
- ✓Use the higher of actual vacancy, submarket vacancy, or your minimum floor (5-10%) for underwriting.
- ✓Only underwrite other income that is currently collected and verifiable in T-12 actuals—not seller projections.
- ✓Revenue validation errors cascade through every metric, making this the most important validation step.
Sources
Common Mistakes to Avoid
Validating rents against asking rents rather than actual signed leases
Consequence: Asking rents may be 3-8% higher than achieved rents due to concessions and negotiation
Correction: Use signed lease comps and effective rents (after concessions) from CoStar or local brokers for validation
Ignoring lease expiration timing when projecting rent growth
Consequence: If 50% of leases expire in one month, you face concentrated turnover risk and potential vacancy spikes
Correction: Map lease expiration dates and model rent growth based on actual renewal timing, not uniform annual increases
Test Your Knowledge
1.What is the most reliable source for validating in-place rents against market rates?
2.How should you validate the vacancy assumption in an underwriting model?
3.What is a common red flag when reviewing other income on a rent roll?