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What does this add to rent?

A requirement costs money to build. That money has to be borrowed, repaid and returned. This works out what the requirement therefore has to collect, every month, from every unit that carries it.

Before you start

What the number means

The figure this tool produces is a requirement, not a prediction. It is the monthly rent per unit that a cost has to generate for the building to carry its debt and return what its equity was promised. It says what the cost demands, and nothing about whether anyone will pay it.

So it does not tell you that rents will rise by this amount. Markets set rents; costs set the floor beneath which a project does not get built. When the required rent runs past what the market will bear, the usual outcome is not an expensive building — it is no building. That gap is the thing worth watching, and it is why we publish this calculation rather than a forecast.

Try it

Change the numbers

Rent impact

Structured parking, 120 spaces at $24,000 each

Capital cost
$2.9M
Units
120
Cost per unit
$24,000
Required revenue / yr
$234.3K

Estimated rent impact

+$163/month per unit

These are the author’s figures. Change a variable to see what moves.

Change the variables

$2,880,000
120 units
6.5%
30 years
See the assumptions
  • 65% of the cost is financed with debt (loan-to-cost)
  • 6.5% interest rate, amortized over 30 years
  • 8% annual cash-on-cash return required on the 35% equity share
  • 5% vacancy and collection loss
  • Costs are spread across every unit and expressed per month
How the monthly figure is built
Debt$1,872,000
Equity$1,008,000
Annual debt service$141,988
Annual return on equity$80,640
Required net operating income$222,628
Required revenue (after vacancy)$234,345
Per unit, per year$1,953
Per unit, per month$163

Defaults: 65% loan-to-cost, 6.5% over 30 years, 8% equity yield, 5% vacancy. This is a model, not a quote.

The tool opens on a worked example. Replace the capital cost and the unit count with your own and the rest follows.

Transparency

How this is calculated

  1. The capital cost is split into debt and equity at the loan-to-cost ratio.
  2. The debt is amortized as a level monthly payment at the stated interest rate over the stated term. Twelve of those payments are the annual debt service.
  3. The equity is required to earn its yield in cash every year. Debt service plus that return is the net operating income the cost has to produce.
  4. That figure is grossed up for vacancy and collection loss, because not every unit collects rent every month, which gives the revenue the cost requires.
  5. The required revenue is divided by the number of units and then by twelve. That is the rent per unit per month.

Defaults are 65% LTC · 6.5% / 30 yr · 8% equity yield · 5% vacancy. Every article on this site that quotes a rent impact runs this same calculation from the same file, and states the assumptions the author used. The sources behind the defaults, and where the method stops being reliable, are set out in our methodology.

In practice

The same math, applied

Read the breakdowns