When it comes to real estate investments, understanding the financial side of things is a crucial step for up-and-coming real estate agents. There are many financial factors that you need to consider before making an investment, but there is one important metric in particular allows you to gauge the stability and potential income of a property. This is known as the Weighted Average Lease Term (WALT). In this blog, we will explain the intricacies of this metric and how to calculate the Weighted Average Lease Term.
What is WALT?
The Weighted Average Lease Term is the metric that represents the average time remaining on all the leases of a property. But it does not simply factor in the average, it also takes into account how much money each lease brings in. As such, leases that have a higher rent value will have a bigger impact on the Weighted Average Lease Term. This metric will help you understand how stable the income from a property is and approximate how long the income will last.
Why is WALT Important?
Real estate is a highly dynamic business with many factors to consider. You need to have a clear understanding of the financial health and stability of a property through various metrics to stay ahead of the game. WALT can help you navigate through the complex landscape that property leases can be.
How does WALT help?
- Income Stability – Through WALT, you can calculate how long the current income from the property will continue to come in. A high WALT indicates long-term income stability, which is what you should be looking for.
- Risk Assessment – You can assess the risk associated with any type of property. For example, if a property has a low WALT, it indicates that the leases associated with that property are expiring soon. Lease expiry can lead to income fluctuations in the near future as well as a need for lease renegotiations.
- Lease Management – You can use WALT to be proactive in your real estate strategies. You will be able to plan for lease renewals early, allowing you to negotiate terms with tenants and minimize vacancies. This way you can maximize your property’s income potential.
- Investment Decisions – WALT can also be used to compare different properties to determine which offers more income security and potential. This is a metric that can influence investment decisions as it provides a roadmap to the property’s current future.
How is the Weighted Average Lease Term Calculated?
There are a number of steps you need to follow to calculate WALT, so let’s break it down.
Step 1 – Collect Relevant Lease Information
Your first step is to collect data on all the leases associated with the property you’re looking at. The information you’ll need is the following:
- Lease Term (in months or years) representing the remaining duration of the lease until it expires
- The annual rent amount for that lease
Step 2 – Calculating the Weighted Lease Term for Each Lease
Depending on the number of leases, you need to calculate the weighted lease term for each of them. You can do this by multiplying the remaining lease term by the annual rent for that lease. Here’s the formula you need to use:
Weighted Lease Term (months) = Remaining Lease Term (months) x Annual Rent
Step 3 – Getting the Sum of the Weighted Lease Terms
Once step 2 is completed, you need to add up all the weighted lease term values. This will give you the total weighted lease term for all the leases in the property.
Step 4 – Calculating the Total Annual Rent
To do this, all you need is to add up the annual rent value for all the leases. This will give you the total annual rent income generated by that property.
Step 5 – Calculating the Weighted Average Lease Term
Now that you have calculated the total weighted lease term and the total annual rent, you can calculate WALT using the following formula:
WALT (months) = Total Weighted Lease Term / Total Annual Rent
An Example of Calculating WALT
To make this easier for you, let’s make use of an example. Imagine you have a property with three leases:
Step 1 – Collect the Lease Information
Lease A: Remaining term = 20 months, Annual rent = $30,000
Lease B: Remaining term = 32 months, Annual rent = $35,000
Lease C: Remaining term = 38 months, Annual rent = $39,000
Step 2 – Calculate the Weighted Lease Term for Each Lease
Lease A: Weighted Lease Term = 20 months x $30,000 = 600,000
Lease B: Weighted Lease Term = 32 months x $35,000 = 1,120,000
Lease C: Weighted Lease Term = 38 months x $39,000 = 1,482,000
Step 3 – Sum up the Weighted Lease Terms
Total Weighted Lease Term = $600,000 + $1,120,000 + $1,482,000 = $3,202,000
Step 4 – Calculate the Total Annual Rent
Total Annual Rent = $30,000 + $35,000 + $39,000 = $104,000
Step 5 – Calculate WALT
WALT = $3,202,000 / $104,000 = 30.78 months
In this example, we can see that the Weighted Average Lease Term for the property is 30.8 months.
Let’s say you’re thinking about purchasing this commercial property. The WALT of 30.8 months indicates that, on average, the leases on the property will generate income for approximately 30.8 more months before they expire. That’s about 2 ½ years worth of income generation still available at the property.
Whether a property has a high WALT value or not is dependent on the type of property as well as the local market conditions. But, on average, over 5 years (WALT value of 60 or higher) is considered to be high. Therefore, your investment will take some judgment on your part. Though, as you can see, WALT can be an important metric that every real estate agent needs to be aware of.