If My Rents Are 20% Under Market, How Much Value Do I Lose on Sale?

One of the most frustrating realizations for small multifamily owners in upstate New York is when they discover that their rents are significantly below market—say 20% under—and the impact this has on their building’s sale price. It’s one thing to know your rents aren’t optimized; it’s another to see what that translates to in lost equity. Having helped multiple landlords manoeuvre tenant-occupied sales across the Capital Region, I’m here to provide some straight-talk clarity on this exact question.

This post dives into the math behind rent discounts, considers in place rent discount and its NOI impact, covers the evolving legal backdrop of Good Cause Eviction and rent regulations, and explains why the buyer pool in today’s market is shifting. I’ll reference tools from McDonald Real Estate Company and the New York State Association of REALTORS® (NYSAR) to back this up.

The Basics: Why Rents Being 20% Under Market Matters

If your rents are 20% below what a comparable unit is bringing in nearby, don’t automatically assume you’re “leaving money on the table” only for that month’s rent checks. The real story is how that gap compounds over time and how buyers see your property’s potential cash flow.

Key Concepts to Understand

In Place Rent Discount: The percentage your current rents lag behind the achievable market rents.
Net Operating Income (NOI) Impact: The reduction in annual income after operating expenses, which translates directly into property value.
Income Buyer Pricing: Investors who base their offer primarily on current income rather than future upside or cosmetic fixes.

In short, a 20% rent gap means your income buyers–the ones typically purchasing tenant-occupied buildings–will assign less value since they’re paying for cash flow that’s clearly below potential. This also tends to filter out flippers or owner-occupants who prioritise capital appreciation from rent bumps.

Crunching The Numbers: How Much Value Is Lost?

Let’s put some numbers on the table. Suppose you have a 10-unit multifamily building with average market rent at £1,000 per unit but your current rents average only £800. That’s the 20% discount.

Metric At Market At 20% Under Market Difference Gross Scheduled Income (GSI) £120,000 (10 units × £1,000 × 12 months) £96,000 (10 units × £800 × 12 months) £24,000 less annual income Operating Expenses (Assuming 40% of GSI) £48,000 £38,400 £9,600 less expenses (expenses scale roughly with income) Net Operating Income (NOI) £72,000 £57,600 £14,400 less NOI

If a typical Capital Region investor requires https://realtytimes.com/new-headlines/good-cause-eviction-changed-what-a-tenant-occupied-listing-is-worth a 7% return (cap rate) on their money, this difference in NOI results in:

At market value: £72,000 ÷ 0.07 = £1,028,571
At discounted rent: £57,600 ÷ 0.07 = £822,857
Loss in property value ≈ £205,714

That’s more than 20% shaved off your building’s sale price solely due to rent below market. This is where the term “in place rent discount” translates into tangible NOI impact and ultimately lower offers.

Tools To Double-Check This Math

The McDonald Real Estate Company offers handy multipliers and cap rate guidance for Capital Region buildings that help sanity-check your estimates. Similarly, the New York State Association of REALTORS® provides market snapshots and rent roll benchmarking to ensure you’re looking at apples-to-apples comparisons.

Legal Realities: Good Cause Eviction and Rent Caps

Before you race to raise rents to market levels and capture that lost value, it’s critical to understand New York’s rent regulation landscape. Since the 2019 passage of the Housing Stability and Tenant Protection Act—and especially with recent municipal opt-in for Good Cause Eviction laws—rent increases aren’t always straightforward.

What Is Good Cause Eviction?

Think about it: this legislation requires landlords to have a valid reason to terminate a tenancy, effectively preventing no-cause evictions. More municipalities in upstate New York are adopting versions of these laws, which slows turnover and makes it harder to remove tenants to reposition units.

Because rent increases are often tied to lease renewals or unit vacancy, this law practically caps how fast you can bump rents to market rate without tenant cooperation or attrition.

The Reality of Rent Caps and CPI-Based Ceilings

Factor Description Effect on Rent Growth Statutory Rent Caps Limits set by state or local law on how much landlords can increase rents annually. Often capped at CPI increases or fixed percentages (2-5%) per year. CPI-Based Ceilings Rent increases tied to the Consumer Price Index, which fluctuates annually. If CPI is low, rent raises may be minimal despite market demand. Exemptions Owners sometimes assume exemptions apply if substantial renovations are done. These exemptions have strict thresholds and owners frequently misread or overestimate their applicability.

Understanding these regulatory constraints is essential because they dramatically affect your timing and strategy for repositioning rents—and therefore the buyer’s valuation. Prematurely pricing a property at market rents without acknowledging these ceilings invites deal blow-ups.

Why Owners Misread Exemptions

I keep a running list of “deal killers” and one big one is when landlords think they can simply exempt individual units from rent caps by doing minimal renovations or cosmetic changes. The reality is that:

Major capital improvements typically require rebuilding or substantial upgrades to qualify.
Documentation matters: you must have clear permits, invoices, and inspection reports.
Many municipal rules require tenants to be relocated temporarily or permanently, increasing costs.

Misreading these exemptions leads to offers based on hopeful upside that just aren’t credible to income buyers, resulting in lower-than-expected bids or deal failures.

The Buyer Pool Shift: Who’s Still Buying Tenant-Occupied Buildings?

Back in the day, landlords could count on a healthy mix of owner-occupants willing to take a value-add approach and flippers chasing rent resets post-renovation. Today’s regulatory climate and capital markets have reshaped the buyer landscape significantly.

Owner-Occupants and Flippers Are Exiting

• Good Cause Eviction and rent caps make repositioning the rent roll slower and riskier.

• Many flippers are discouraged by high carry costs and restricted upside.

• Increased scrutiny on tenant records and deposit accounting adds transaction complexity.

The Growing Dominance of Income Buyers

Professional investors focused purely on income—and often locked to stricter underwriting—now dominate deals. They value stable, predictable cash flow above all else and apply significant discounts for any rent roll below market, given the limited ability to “force” rent increases.

This means you can’t just twiddle knobs expecting buyers to see your building’s “hidden” potential. If your rents are 20% under, expect offers reflecting that gap firmly embedded in the NOI and valuation.

Summary: What Should Owners Do?

Sanity-check your rent roll: Use calculators or tools from McDonald Real Estate Company or NYSAR to crunch your actual in place rents against market comps.
Understand Good Cause Eviction and your municipality’s rules: Don’t assume rent increases or evictions are simple; get clear legal guidance.
Document everything for exemptions: If you are positioning your property for rent cap exemptions, make sure you have the paperwork and work scope to back it up.
Price your building for the current income: Unless you have a clear plan and timeframe to raise rents, income buyers will price based on NOI.
Be realistic about buyer types: Expect income buyers to be your primary market and structure your expectations accordingly.

For landlords and agents who want no BS, data-driven advice on dealing with tenant-occupied multifamily sales in today’s regulated New York market, understanding the math behind in place rent discounts and their impact on value is non-negotiable.

Further Resources

McDonald Real Estate Company Multifamily Market Reports
NYSAR Legislative Updates on Rent Regulation
New York State Good Cause Eviction FAQs (NYHCR)

If you are considering selling or buying tenant-occupied buildings, always sanity-check rent caps and NOI with a calculator before relying on Facebook “hot takes.” Your bottom line—and sanity—depends on it.