Whether it’s for a multifamily property or single-family rental (SFR), every rental property investor wants to collect the highest rent possible to maximize the value of their investment. But it can be difficult to find good sources of rental market data, and challenging to determine which properties are truly relevant rent comps for your investment.
In this article, I'll explain the best ways to find rental comps that help set fair market rents, reduce turnover, and maximize the value of your investment properties.
Rental comps (also referred to as rent comps, comparable properties, or simply comps), are used to compare similar rental properties and set market rents.
The process of surveying rental comps is similar to creating a comparative market analysis (CMA) for a single-family property valuation. Instead of determining property valuations though, rental comp analysis is meant to set a competitive and fair market rent for each of your units.
If you want to attract good tenants and minimize vacancy, you need to keep your property’s rent in line with the rents other investors are charging for comparable units.
The market is the market – you can’t just charge whatever you want and expect to maximize profitability. Charge too little, and you’re clearly going to leave money on the table. Charge too much, and you’ll also leave money on the table… in the form of higher vacancy rates and a longer downtime before securing your next tenant.
Your goal should be to attract the most qualified tenants, keep vacancy rates low, and keep your gross rental income and cash flows as high as the market will support.
The best rental comps come from properties that are nearby and very similar to the property you are analyzing – also referred to as the “subject” property. Market rents vary from one neighborhood to the next, and sometimes even from block to block in the same market area.
Here are a few of the most important variables to analyze in your rental comp analysis:
At this point, you’re probably thinking “Wow, that’s a lot to analyze”. It’s true – being a successful real estate investor is hard work. This is exactly why we built HelloData.ai to automate the rental market analysis process for real estate investors, which we’ll talk more about below.
There are several resources you can use to find comparable rents and put together a rent comp analysis, including both online and offline sources. Here are a few of the best options:
When analyzing rent comps, single-family investments require more focus on unique features and neighborhood attributes, while multifamily properties have more uniform units and shared amenities. This means recently signed leases for units in the same property can be used to inform multifamily rents, while in SFR they cannot. In single-family rentals, since tenants tend to stay for longer terms, property characteristics like layout and private amenities play a larger role. In multifamily, market trends and the quality of shared facilities tend to be more important.
Below are examples of a multifamily comp analysis and an SFR comp analysis to illustrate some of these differences:
Property Description: 10-unit apartment building, each unit 2-bedroom, 1-bathroom, 800 sq. ft.
Location: Urban area, close to public transportation and amenities, higher crime rate.
Comparable Properties:
Analysis: Average rent for comparable properties is approximately $1,183/unit.
Considerations: Building amenities, unit upgrades, and management quality can influence rent levels.
Property Description: 3-bedroom, 2-bathroom house, 1,500 sq. ft.
Location: Suburban neighborhood, good schools, moderate crime rate.
Comparable Properties:
Analysis: The average rent for comparable properties is approximately $1,567/month.
Considerations: Property condition, amenities, and exact location may adjust rent up or down.
Don't forget to include factors like vacancy rates, local market trends, property taxes, and maintenance costs to get a comprehensive understanding of the investment's potential.
Investors buy properties for the stable cash flow and tax benefits these investments generate, so it makes sense that the value of an investment property depends on its income generating potential.
There are three ways to determine the market value of a property: The Income Approach, the Sales Comparison Approach, and the Cost Approach.
For most investment properties, the Income Approach makes the most sense, because income is why you're buying it in the first place. But it's also important to use the Sales Comparison Approach to make sure you're not paying above market.
As a first step, ask your broker to prepare a Broker Opinion of Value (BOV) to compare with the asking price. This will give you a good sense of the market value, but you should always do your own due diligence too. Here are the steps for that analysis.
You’ve already surveyed your rent comps, so you know how much rent the property should be generating. If the property is being marketed for sale, you'll receive a rent roll as part of the due diligence process. Make sure to analyze the rent roll to see if the in-place rents are too high, too low, or at market.
Below-market rents could indicate the property is under market because it needs repairs. Check if rents are above market too, because tenants paying above-market are more likely to leave for a cheaper place when their leases expire. Turnover costs can be significant if you have to find a new tenant.
You can use the 1% Rule (which states that a rental property should generate a minimum gross monthly rent of at least 1% of its market value) to ballpark where rents should be, then compare with your comps.
If the property is being marketed for sale at $200,000, the 1% rule means rents should total at least $2,000 per month to make the investment worthwhile:
If the comps indicate rents of $2,500 per month are achievable, it exceeds the 1% Rule minimum:
If the comps come in at less than $1,000 per month for the subject property, there may not be enough cash flow to cover repairs & maintenance, mortgage payments, etc. Unless you’re buying a value-add deal, it might be better to pass.
Next, you need to determine the costs of owning and operating the property and subtract those from your gross income to arrive at your Net Operating Income (NOI):
Using the 10-unit multifamily property we outlined above as an example, with average rents of about $1,200/unit, you could generate $144,000 per year in rents if the property is fully occupied. If you find that comparable properties are getting $1,000 per month in other income, add that figure to get your Gross Potential Revenue. This would be $156,000 for our hypothetical 10-unit property.
Properties are rarely fully occupied though - tenants eventually move, and that results in vacancy loss.
If other properties in the market are seeing 5% vacancy rates (ask your broker) then you'd subtract 5% from that $156k figure to get an EGI of $148,200.
If your EGI is $148,200 and your operating expenses (excluding mortgage payments) are $60,000 a year, your NOI is $88,200.
To calculate net cash flow, subtract your annual mortgage payment from your NOI:
With your income and expenses modeled, you can now estimate the value of the property. Ask your broker what market cap rates are for similar properties, or look at recent sales in the market on a resource like CoStar to estimate cap rates.
From there it's very simple - just divide NOI by cap rate.
$88,200 NOI / 6% cap rate = $1,470,000
Basically, if you want to make a 6% return, you should be willing to pay $1.47M for the property. Of course that's after securing a mortgage, so your true out of pocket costs would likely be around $441k (30% cash, 70% mortgage).
You can also use the Gross Rent Multiplier (GRM) which compares the gross rental income to the property value. You'll have to ask your broker for typical GRMs too, they should have a strong knowledge of the market. The lower the GRM the more profitable an investment is:
By themselves, these calculations don’t tell you how strong an investment is. But by comparing the numbers to other recent sales, you can understand the value of your property relative to others in the market.
If you’re analyzing rent comps and evaluating property values manually, everything above is important to understand. As someone who has worked in real estate development, investment and brokerage for many years, I’ve personally done rental comp analyses and leveraged many of these sources to support my market rent conclusions.
Having done it firsthand, the team at HelloData.ai knows EXACTLY how time consuming it is to determine your most relevant rent comps, analyze their market rents, calculate the value of net effective rents from posted specials, and derive accurate market rents for both single and multifamily investments.
This is why we built HelloData in the first place. Our platform automates rental comp analysis in several key ways:
We use computer vision to determine the condition, quality and amenities in over 2.1 million multifamily and single-family rental properties throughout the U.S., and we use this data to identify properties that compete for the same renters.
By analyzing the visual appeal of rental properties from listing photos, in addition to extracting and standardizing over 200 unique building and unit level amenities, we help facilitate apples-to-apples comparisons of millions of listings every day.
By combining this approach with detailed demographic data, crime levels, school district ratings, and each of the attributes mentioned above, our platform can identify rental comps more accurately than any other platform on the market.
Our comps align with appraiser rent comp selections over 90% of the time (granted appraisers aren’t perfect themselves, and have subjectivity baked into their analyses). Since appraisals are required for financing on any investment property, delivering the same comps as appraisers do is a key advantage of our platform.
It’s one thing to visit a property website or listing site and see what their asking rent is. It’s another thing entirely to track rents every single day and capture the asking rent on the day each listing is removed from the market.
In single-family, if someone lists their home (a for sale by owner listing for example) at $1M dollars, no appraiser, broker or investor in their right minds would just accept that as the market value of the property.
Yet in multifamily, analysts visit property websites and listing sites every day, copying asking rents straight into their pro formas as if they are indicative of market rents. Nonsense.
We capture where the most similar units in the market (at the floorplan level) actually closed because that’s how real estate valuation is supposed to be done. We’re essentially performing a mini-appraisal on millions of multifamily listings across the U.S. every day to help investors and asset managers determine true market rents.
Asking rent is important, but net effective rent is the REAL market rent. If a landlord is offering 2 months of free rent for any tenant who signs a lease by the end of November, that means they are paying 10 months of a 12 month lease. That’s 16.7% less than what was advertised!
If you’re off by 16.7% on your market rent analysis, when typical real estate returns are around 15% (and definitely less in 2023 with rent growth largely flat across the U.S.), you’re going to lose your ass on that investment. If you’re an analyst, you’ll lose your job.
HelloData is the only platform that tracks the specials posted across thousands of property websites and several listing sites every day, using AI to extract the dollar value of concessions from the specials text. We calculate net effective rents in real time for you using the latest advancements in AI, so you always know the true market rent for every unit, in every rent comp.
At the end of the day, there are many sources of market data and many ways to identify rental comps. You can use your judgement and experience to determine what is comparable, then copy asking rents from property websites, Zillow, etc. and analyze that data to estimate market rents. If you don’t phone it in, it takes hours – I know because I’ve done it countless times myself.
But if you have an address, and you’re interested in accurately identifying rental comps, surveying market rents and determining property value in SECONDS, try HelloData.ai.
Property managers, investors, brokers and appraisers all use HelloData to analyze multifamily comps, optimize rents, and increase deal flow.
