A 5% rent-growth assumption arrives in the model looking like one fact. Put it on a calendar and it becomes a crowd: lease expirations, renewals, move-outs, concessions, renovated units, and residents deciding whether your new price deserves another year.
The decimal hides the calendar. That is the first problem.
Rent growth is the change in rent over time. For underwriting, the useful question is narrower: Which units can move to which rent, on what date, with what concession, and how much of that rent will actually be collected?
If the answer is still “5.0%,” nobody answered the question. They read the cell back to you.
One percentage is giving five statements
Separate the growth story before touching the model:
| Claim | Best property-level evidence | What can invalidate it |
|---|---|---|
| Market asking rents are rising | Same-unit-type competitor surveys with dates and concessions | New supply, stale listings, weak comp selection |
| New leases are signing higher | Executed leases and move-in ledger | One premium lease treated as a trend |
| Renewals can move higher | Renewal offers, acceptances, notices, and retention | Turnover cost or resident pushback |
| Renovations earn a premium | Matched before/after leases for completed units | Different floorplans, season, or concession |
| Collected rent will rise | Tenant ledger, delinquency, bad-debt, and bank-deposit history | Nonpayment, vacancy, skips, or write-offs |
Those claims may overlap, but they do not become interchangeable. Asking rent can rise while renewal acceptance falls. Renovated units can lease at a premium while concessions erase part of it. Scheduled rent can increase while cash collection gets worse.
If one renovated unit receives market growth, a renovation premium, and loss-to-lease capture in three rows, check whether the same dollar has been hired for three jobs. Models do not object to duplicate employment. Bank accounts eventually do.
Exhibit A: the 5% that becomes 8.75%
Take 100 units at an average scheduled rent of $1,200 per month. Current annual gross potential rent is:
100 x $1,200 x 12 = $1,440,000
The pitch applies three levers in Year 1:
- 5% market growth to every unit for a full year: +$72,000;
- a $150 monthly renovation premium on 40 units, in service for six months on average: +$36,000; and
- $100 of loss-to-lease capture on 30 units, also for six months on average: +$18,000.
Total modeled lift is $126,000, or 8.75% of starting gross potential rent. The headline says 5%. The revenue bridge says the property must produce considerably more before anyone has proved the turn schedule, lease expirations, retention, concessions, vacancy, or collections.
That is how a modest assumption grows extra limbs between the rent roll and Year 1 revenue.
Now rebuild it from evidence:
- recent signed trade-outs support 2.5% growth, captured halfway through the year as leases roll: +$18,000;
- the construction schedule supports 28 completed renovations at a $125 premium for six months on average: +$21,000;
- lease files support $75 of loss-to-lease capture on 24 eligible units for six months: +$10,800; and
- leasing requires two weeks free on 30 new or renovated leases averaging $1,325: -$18,346.
The checked lift is about $31,454, or 2.18%, before vacancy and bad debt. Nothing cynical happened. Dates, eligible units, and concessions were merely put on the calendar.
The gap between $126,000 and $31,454 is not a debate about attitude. It is the price of replacing a blanket percentage with a unit-level schedule.
The decimal returns at the sale
Start again at $1,200 monthly rent and hold for five years:
| Annual growth | Year 5 monthly rent | Year 5 scheduled rent, 100 units |
|---|---|---|
| 1% | $1,261 | $1.513M |
| 3% | $1,391 | $1.669M |
| 5% | $1,532 | $1.838M |
The 5% case produces roughly $324,000 more Year 5 scheduled rent than the 1% case. Assume 7% economic loss, a 55% incremental NOI margin, and a 6% exit cap. The difference becomes approximately:
$324,000 x 93% x 55% / 6% = $2.76 million of modeled value
The decimal changes annual revenue, passes part of that change into NOI, and then capitalizes the result into sale value. Optimism gets paid twice because the same rate reappears at the exit.
Run at least 1%, 3%, and 5% growth cases. Show effective revenue, NOI, DSCR, and net sale proceeds in each. A deal that survives only at 5% is not supported by the sensitivity table. The table has identified the hostage.
Broad data is context, not the lease
“Market rent” depends on the dataset and the question it was built to answer.
The Bureau of Labor Statistics’ CPI rent measure includes new leases, renewals, and mid-lease tenants. Its research New Tenant Rent Index uses first observations after new tenants move into sampled units. Those series answer different questions; the new-tenant series also uses a smaller sample and is revised.
Zillow’s Observed Rent Index measures movement in asking rents and uses repeat observations to control for changes in the rental stock being listed. That is useful market evidence. It is not the subject property’s executed lease, effective rent after concessions, or collected cash.
Census vacancy data helps frame supply and demand. It cannot tell you whether a 1987 two-bedroom with old finishes can match the new property across the street offering six weeks free.
Use broad indexes to challenge the market story. Use executed leases and actual collections to underwrite the property. A national or metro series can describe the weather; it cannot establish that this unit signed at this rent.
Where the timeline breaks the story
“Rents are 15% below market” often compares in-place contract rent with a competitor’s asking rent. That skips concessions, unit condition, utilities, fees, floorplan, availability, and the cost of moving a current resident out. A gap is not a collection plan.
These are the signs of a growth rate entered before anyone built the timeline:
- one growth rate applied to occupied, vacant, renovated, and classic units alike;
- annual growth credited on January 1 even though leases expire throughout the year;
- asking rents shown without screenshots, survey dates, or concessions;
- renovation premiums based on unmatched units or unsigned applications;
- renewals underwritten at new-lease rent with no retention history;
- market growth, loss-to-lease, and renovation premiums stacked on the same units without a unit-level bridge;
- physical vacancy held flat while turnover and renovation volume jump; or
- Year 3 growth presented to one decimal place when Year 1 trade-outs are not available.
Precision is not proof. Sometimes it is just uncertainty with better tailoring.
Questions that force dates onto the record
Ask for the current rent roll in spreadsheet form, not a screenshot. Then ask:
- Which leases expire each month?
- What were gross and effective trade-outs on the last 20 new leases and 20 renewals?
- How many renewal offers were accepted, rejected, or unanswered?
- Which completed renovations earned the modeled premium on the same unit type?
- What concessions are active today?
- How much scheduled rent became cash after vacancy, delinquency, and bad debt?
- Which units receive more than one growth assumption in the model?
Finally: What happens to NOI and exit value if market growth is cut in half and renovations take twice as long? Get the answer in dollars. Reassurance does not fit in a debt-service calculation.
Replace the blanket cell
Choose the next 12 months of lease expirations and build a unit-by-unit rent bridge: current rent, expiry date, supported renewal or new-lease rent, concession, renovation status, expected downtime, and collection probability. Sum that bridge and replace the blanket Year 1 growth cell with the result.
Now the assumption has names, dates, and units. More important, it has somewhere specific to fail.
This is education, not appraisal, leasing, legal, or investment advice. Market indexes have different scopes, property results vary, and signed leases plus actual collections control the underwriting test.
Data and methodology sources
PR Steinfurth Equity provides educational information only. Nothing on this website is an offer to sell or a solicitation of an offer to buy any security, nor investment, legal, or tax advice. Any securities offering is made only to qualified investors through official offering documents. Real estate investments involve risk, including possible loss of principal. Past performance is not indicative of future results.