How to Do an Accurate Rental Analysis in 5 Steps

Accurate rental market analysis is paramount to investor success as it helps locate the areas with the highest potential for rental investments.

Investing in a rental property can be lucrative if you know what you’re doing, and one of the most important factors to be knowledgeable about in real estate is location. Certain markets are optimal for real estate investments, while others are not ideal for this purpose. That’s why investors need to conduct proper research before buying an investment property to ensure good ROI.

Table of Contents

What Is a Rental Market Analysis?
What’s the State of the US Rental Market in 2023?
How to Conduct an Accurate Rental Market Analysis in 6 Steps
Getting Started With the Best Tool for Analyzing Rental Markets

According to expert housing market predictions, 2023 is expected to be a great year to invest in both long term and short term rental properties. Rental rates will continue to rise, while demand for vacation rentals will further increase as people make up for the missed travel opportunities during the pandemic. Nevertheless, not all US markets will provide the same profitability for a rental property.

As an aspiring traditional landlord or Airbnb host, you should perform a rental market analysis (RMA) before buying an investment property. RMA will help you assess whether a specific area would be good for rental property investment before putting your money there. Depending on your preference (long term vs short term rentals), you might need to look at different factors.

Here, we’ll take you through the six steps required to conduct an accurate analysis of the rental market. We’ll also show you how the Mashvisor tools can help you each step of the way so that you not only save time but also boost accuracy and reliability.

What Is a Rental Market Analysis?

Rental market analysis is an essential part of the real estate investing process. It comprises collecting and analyzing market-level real estate data and rental data on the location where you’re investing. RMA provides a complete overview of the rental market and how income properties are performing there in terms of all crucial indicators.

Some of the most popular metrics to look at when analyzing the investment potential of an area include property prices, competition, rental rates, rental demand, occupancy, cap rate, and cash on cash return. The said numbers help investors evaluate whether they can afford to purchase an income property in the local market and whether it will bring them the expected return on investment.

Moreover, analyzing the performance of existing rental properties helps landlords and hosts set up the right pricing for their rental units once they start renting out. Offering competitive rental rates by zip code will help them optimize occupancy without leaving money on the table.

Why Is RMA Important?

The importance of real estate market analysis lies in the fact that it helps you make wise, profitable investment decisions and, later on, optimize the bottom line of your real estate investment.

First of all, the rental market analysis serves as a market predictor. By evaluating the factors affecting rental property investments, it lets investors determine the potential income and cash flow of real estate listings there.

Knowing a property’s potential profits before making a purchase will help avoid any unpleasant surprises after closing the deal. It’s much easier to buy a winning property from the get-go rather than purchasing a suboptimal rental property and working on making it a winner.

Second, upon purchase, you must determine the rental rate that you’d ask for your property, and the best way to do that is through RMA again. When you know competitors’ rates, you can choose a range that will bring you the necessary balance between occupancy and rent to maximize monthly revenue.

That’s why conducting analysis of the rental market is one of the key steps in the process of buying long term and short term rentals for sale and starting a rental property business.

As a savvy investor, you should keep in mind that there are three main types of rental market analysis that you need to consider: nationwide, city-level, and neighborhood-level. In the following sections, we’ll show you how to go about each one of them.

What’s the State of the US Rental Market in 2023?

Before looking at the steps that go into analyzing the investment potential of a real estate market, it’s important to take a look at the overall state of the US rental market this year. Whether you prefer to go for long term or short term residential rentals, you need to know the nationwide trends. Such trends will affect your investment and you should be aware of how they are expected to impact your ROI.

There are a few major macro-level factors that influence the performance of real estate rental properties. They include residential real estate prices and mortgage rates. The higher they are, the less affordable it is for homebuyers to purchase a house. So, they resort to renting. It translates into a high demand for long term rentals, increased rental rates, and opportunities for new landlords to enter the market.

At the same time, while property values and interest rates affect investors, they are able to access other types of loans except for conventional mortgages, so the impact is less. It means investors can emerge as the overall winners in such situations.

Alternatively, investors who prefer vacation rentals need to keep an eye on travel and tourism trends. The COVID-19 travel bans’ devastating impact on the short term rental property industry demonstrated just how important travel is for vacation rental investments. The more people travel domestically and the more foreigners who visit the US, the better the performance of Airbnb-style rentals.

How Did the Rental Market Do in 2022?

After the impact of the global pandemic in 2020 and 2021, 2022 was very much a year of recovery in the US housing market. Zillow reports a year-on-year appreciation of 8.66% for residential property prices between January 2022 and January 2023. The rate is less than the appreciation of property prices in 2020 and 2021 but still above the average annual rate.

Meanwhile, the 30-year fixed mortgage rate doubled over the course of last year, from 3.22% to 6.48%, according to Freddie Mac.

The combined effect of the two factors above was making homeownership affordable for many first-time buyers, further exacerbating the already existing affordable housing crisis. As a result, the national US rental market benefited from increased demand, pushing rental rates higher. Rent.com reports a YOY rise of 15.57% in the median rental level in the US in 2022.

The said figures made last year a great time to invest in a long term rental. It enabled investors to benefit from the steeper increase in rental rates than in property prices. It is particularly beneficial to those who secured one of the best loans for investment property.

Things worked out well not only for investors in the long term rental market but also in the short term rental market. As most coronavirus-related travel restrictions were lifted, both leisure tourists and business travelers resumed their traveling and their demand for hotel alternatives. 2022 experienced a major revival in the vacation rental industry, bringing positive results for investors.

What Are the US Rental Market Predictions for 2023?

According to a panel of 19 real estate experts that we interviewed at the end of 2022, this year’s US housing market predictions are excellent for rental property investors.

As increases in property prices are expected to slow down and the mortgage interest rate is forecast to return to a more affordable level, the real estate market will start normalizing and neutralizing. It is good news for beginner investors with limited financial resources.

Importantly, as an aspiring investor, you should not worry too much about a significant decrease in rental demand as homeownership becomes more affordable. Residential real estate prices will remain above the pre-pandemic levels. The intensifying talks about a looming recession will put homeownership on hold for many first-time buyers.

At the same time, most experts predict that rental rates will continue to go up, especially in some real estate markets. So, as long as you invest in a market with a high price to rent ratio, you should not suffer from high vacancy. Just remember that you should look for markets that promise positive cash flow and good ROI as well.

In terms of short term rentals, things are looking up for investors there as well.

So, all in all, the national rental market analysis is displaying strongly positive indicators for rental property investors in 2023.

How to Conduct an Accurate Rental Market Analysis in 6 Steps

If you want to assess the rental potential of a specific real estate market, you need to conduct a comprehensive and accurate rental market analysis. The goal of analyzing the rental market is to better understand the average prices, rent, and return on investment in the area. They will inform your decision on whether to invest there or choose another more promising location.

Moreover, rental market analysis should tell you whether or not available rental properties for sale make sense. The comparative side of the analysis allows you to know if a rental will outperform the competitors in a particular zip code or not. Thus, it is an important step not only in selecting the best market but also the best property.

To perform analysis of the rental market analysis, you should know the six steps involved in this process:

Step 1: Analyze the City

The first step in analyzing rental markets before buying an investment property is taking a look at the city. Several factors make certain cities better suited for investing in rental properties than others.

Specifically, you need to look at:

Prevailing property prices: Go for a city where you can afford to purchase without risking foreclosure.
Real estate appreciation rates: Invest in a real estate market where your property’s value will go up over time to make money in the long run.
Share of renters vs. homeowners: Choose a rental market where the population tends to rent rather than own.
Average rental rates: Make sure that the rental income is enough to bring good profit, considering the property values of single family or multifamily homes within the zip code.
Rental demand: Look for markets with strong job opportunities and positive population growth where finding tenants will not be a problem, or where lots of tourists visit year-round.
Price to rent ratio: Find a good balance between rental rates and rental demand.
Average rental operating costs: Look for cities where costs are significantly less than revenue to assure positive cash flow.
Return on investment: Look for the average cap rate and cash on cash return that rental properties bring. Aim for cities with rates above 5% (and individual properties above 8%).
Legal environment: Invest in landlord-friendly states to be on the safe side. Even more importantly, look for areas that allow non-owner-occupied short term rentals if that’s your preferred rental strategy.

How to Analyze Cities Quickly and Effectively

As you can imagine, conducting rental market analysis on thousands of US cities and towns is impossible. It requires obtaining, cleaning, and computing billions of data points which is beyond the capacity of any human, whether using Excel spreadsheets or not.

But Mashvisor can help you locate the best areas for both rental strategies in an effortless manner. You can refer to the Top Locations section of the Mashvisor blog for up-to-date rankings of the most suitable real estate markets based on various factors like affordability, occupancy, rental income, and ROI.

In addition, you can access the Mashvisor short term rental regulations page for a quick reference on the laws governing Airbnb investments in various locations. For each location, you can find a link to the local authorities’ website with detailed information on the regulations to augment your research.

Step 2: Evaluate the Neighborhood

When analyzing a rental market, the city is not enough, so the next step should be diving into the specific neighborhood. Especially in large metro cities, each area comprises its own rental market, with its own requirements and providing its own results to investors.

There are certain things that attract tenants and/or Airbnb guests to a neighborhood, and they will help your investment property perform well and bring high profit. On the other hand, there are things that repel renters. That’s why you need to keep a close eye on all these indicators when conducting comparative rental analysis to choose the top location.

Important Factors to Look for in a Neighborhood

Here are a few positive factors that you should search for in an area:

Access to public transportation: Not all renters own a car, so having the option to commute is essential, whether living in the area or staying for a vacation.
Reasonable walkability score: In most cases, the walk score in an area is as important as having access to public transport, as there are people who prefer to walk rather than drive or ride.
Access to quality education: If your target renters are families with kids, access to quality education is also crucial. That’s why you should look for good private and public school options when choosing a neighborhood to invest in.
Nearby amenities, facilities, and attractions: Choosing a location that features a variety of amenities, such as parks, libraries, and cultural venues, is a plus.
Easy access to dining and shopping: Another plus factor is the availability of restaurants and shops within or near the area, especially if you want to buy a vacation rental.
Easy access to medical services: You should check on available ERs, clinics, and hospitals near the location to ensure that your tenants will not have difficulty finding one should they need it.
New businesses: An area where new businesses are being launched is great for investing in rentals because the area is undergoing development.
Safety: Renters want to live in areas that are safe and clean. Make sure to invest in safe neighborhoods to ensure demand for your rental property.

While you can expect to face higher property prices in areas that tick all the boxes, the increased demand from renters and the better rental rates will compensate for the difference. Overall, you can generate much better ROI in neighborhoods with positive indicators.

Things to Avoid When Looking for a Neighborhood to Invest In

When conducting neighborhood-level rental market analysis, look for areas that don’t have:

Poor maintenance: Areas that aren’t well-maintained and cared for are a big no-no. Make sure to avoid areas with many potholes, dirty sidewalks, broken street lamps, and suspicious bystanders.
Multiple distressed or vacant properties: If a neighborhood has numerous distressed properties and homes that are vacant, it can be a red flag. You wouldn’t want to invest in that area.
Closed businesses: Another red flag is if more than a few businesses are permanently closed. It means the area is not growing enough, and people are no longer investing in that location.
Noisy and polluted areas: Check the neighboring single family and multifamily homes, businesses, and facilities and make sure they are all conducive to harmonious living. Avoid noisy areas with excessive pollution levels like a factory.
Remote areas: Avoid a neighborhood that is located in a remote and isolated place. Nobody would want to live in a neighborhood that isn’t easily accessible to schools, medical facilities, and shops.
High crime rates: Before you buy a rental property, make sure you check the crime rates in the area. No one wants to rent in a location that is unsafe. Moreover, your investment property might be vandalized.

A rental market analysis will show you that your potential return on investment in areas with negative indicators is, in fact, not so good. Even though properties are cheaper, expenses will be higher than the average rent, leaving you with negative cash flow and an underperforming investment property. Moreover, finding renters can be difficult for properties in isolated, unsafe neighborhoods.

Step 3: Find Rental Comps

After you know what the neighborhood is like, in terms of high-level indicators, you need to determine if it’s a good place to start investing in long term or short term rentals. So, the next step in the rental market analysis is to look for comparative properties to the one that you are planning to purchase. Rental comparables, or rental comps, help property investors derive the average rent for the area.

It’s important to note that not every property that’s located within or near the area of the subject property can be considered a comparable property. In general, rental comps are in the same neighborhood and the same zip code. They should follow the same rental strategy, either as a long term or short term rental. Also, they should share similar features and amenities.

Typically, good rental comps should be similar with regard to:

Square feet
Property type (single family or multifamily)
Number of bedrooms
Number of bathrooms
Lot size
Condition (updated, original, distressed, etc.)
Age of the building
Amenities

How to Find Rental Comps

Real estate investors should try to find at least three rental comps for accurate rental market analysis. Try talking to a realtor or a property manager and ask about comps for your rental property.

Also, check out long term and short term rental listing websites like Zillow and Redfin (for the former) and Airbnb, Vrbo, and Booking.com (for the latter). Additionally, you can try befriending local landlords or hosts and obtain the required information from them.

However, finding rental comps and analyzing them manually can be a tedious task. You’ll need to find all the necessary information on your own and make sure they’re accurate. Then, you’ll have to input all these data into an Excel spreadsheet and manually compare them with your subject property. This is not only time-consuming but also prone to human error.

Fortunately, rental property investors can find available comparable properties and all their details on one website. You can use Mashvisor to get all the information you need for this step of rental market analysis.

You can search for a property by the street address or the zip code and gain immediate access to both long term and short term rental comps. The provided information includes:

Similarity
Distance
Number of bedrooms and bathrooms
Monthly rental income
Daily rate
Occupancy rate
Ratings and reviews

The last three metrics refer to vacation rentals only. So, in this way, you can know immediately how properties similar to the one you’re considering investing in are performing in the local rental market.

Sign up for a 7-day free trial of Mashvisor now to start analyzing neighborhood-level rental markets.

In each Mashvisor listing page, you can find a list of comparable rental listings that are similar to and in the same area as the property you are viewing.

Step 4: Calculate the Rental Rate

One of the main goals of conducting rental market analysis is to find out how much money you can make in the area, so the next step in the process is computing the rental income.

If you invest in a long term rental property, the rental revenue is basically the monthly rent that you charge. However, if you plan to buy a short term rental, things are a bit more complicated. The monthly short term rental income is the product of the average daily rate and the occupancy rate. We say the average daily rate as Airbnb nightly rates are dynamic and change from day to day.

So, once you’ve identified the rental comps in Step 3 above, it’s now time to create a range of rental estimates that make sense for properties similar to your choice in your local rental market. You can expect your revenue to fall anywhere within this range. But to optimize the performance of your property, you need to price it at the optimal rate, not just anywhere in the range.

To do it, you need to analyze exactly how similar and different your rental property is from the comps. Don’t look only at high-level features like the number of floors and rooms, but also go into details like quality of furnishings, amenities, etc. Position your property exactly where it belongs along the range of available comps to find out the most suitable rental rate.

How to Find Rental Income

Calculating the prevailing rental rates in a neighborhood and the best rate for your specific property requires a lot of long term and short term rental data collection and analysis. Alternatively, there are a few tools available on the Mashvisor platform that can help you achieve this goal.

In specific, the Mashvisor neighborhood analysis pages give real estate investors access to the average long term and short term rental income in all neighborhoods across the US real estate market. It helps investors get an idea of what monthly revenue they can expect with either rental strategy.

The Mashvisor investment property calculator shows landlords and hosts not only what rental income they can expect but also what revenue comparable properties generate in the area. It means that the estimated income for a property is not some vague number. The figure is based on the actual performance of comparative active rentals in the neighborhood.

Step 5: Determine the Costs of Rental Properties

So, once you’ve gotten that far in the rental market analysis, you know that you’re investing in a desirable neighborhood and what the rental price is likely to be. Now, as a savvy real estate investor, you need to know what recurring monthly expenses you can expect in the area. After all, every long term rental or Airbnb business incurs certain operating expenses.

Knowing how much you will need to spend on renting out and maintaining your income property is important for a number of reasons. First of all, the cash flow is the difference between rental income and rental costs, and it must be a positive number. Otherwise, you’re simply losing money from real estate instead of making money.

Second, the cash flow is present in all return on investment formulas, so it means that monthly rental costs affect profitability. The lower the operating costs, all else equal, the higher ROI you’re able to generate from your investment.

What Expenses Rentals Incur

Let’s take a look at the most popular expenses that you’ll need to cover when renting out a single family or multifamily home:

Monthly mortgage payment
Property tax
Home insurance
Rental income tax
HOA dues
Property maintenance
Property management
Utilities
Restocking
Airbnb and/or another listing platform fees
Rental marketing fees

How to Estimate Rental Costs

When analyzing the investment potential of a rental market, the process for finding the prevailing rental expenses is similar to the process of finding the prevailing rental rates. Costs vary from one real estate market to another, just as they vary from one property to another. The costs differ because of size, rental strategy, amenities that need to be maintained, etc.

The conventional way to factor costs in your rental market analysis is by looking for rental comps and figuring out what expenses they generate per month. But that’s even harder than finding the income that is usually available on rental listing websites. No long term or short term rental listing platform shows the monthly expenses. So investors need to talk to other investors.

The most efficient way to estimate rental costs is to use an AI-driven tool like Mashvisor. The Mashvisor real estate investing app provides investors with a precise estimate and a detailed breakdown of the monthly expenses they can expect, based on the performance comps in the market. It eliminates the need to look for comps manually and include them in your analysis.

Step 6: Figure Out ROI in the Market

Last, but not least, when performing rental market analysis, investors need to find out what return on investment they can expect there. The ultimate goal of any real estate analysis is to find the most profitable opportunities, whether in terms of a location or an actual property.

The two main ROI market-level metrics in rental property investing are the cap rate and the cash on cash return. They are somewhat similar, with the major exception that the cash on cash return considers the method of financing, which makes it a more comprehensive measure, but also harder to calculate.

Knowing what cap rate and cash on cash return a certain neighborhood brings allows you to decide if it’s a good choice or if it’s better to look for an alternative location. Furthermore, comparing the long term and short term rental ROI helps you pick the best rental strategy for this specific market if you don’t have strong preferences.

How to Calculate Return on Investment in a Neighborhood

To find out what return on investment a market is able to offer, you must make a lot of calculations based on the rental income and rental expenses data that you gather. Once again, traditionally, it requires a ton of manual calculations, especially if you haven’t decided on a rental strategy and a property type.

Once again, the Mashvisor Airbnb calculator can help you out a lot in this regard. As a beginner investor, you might know the city where you want to purchase but have no clue about the top area. The Mashvisor heatmap can help you identify the most affordable neighborhoods with the highest rental income and cash on cash return in any US city or town.

To deepen your real estate market analysis, on the neighborhood analysis pages, you can view the average cash on cash return for each rental strategy in the area. As with everything else, it is based on the actual performance of rental listings in the market, making it highly reliable and trustworthy.

Getting Started With the Best Tool for Analyzing Rental Markets

Conducting an accurate rental market analysis is at the core of making profitable real estate investing decisions. However, as you must’ve gathered by now, it requires a lot of effort and work to get optimal results. Indeed, it’s estimated that a real estate investor needs an average of three months to complete all necessary research, analysis, and calculations.

That is unless they use the Mashvisor rental property investment platform. With Mashvisor, you can conclude all the steps in analyzing a location’s investment potential in 15 minutes with just a few clicks of a button.

You can find the top US cities for long term and short term rentals, and you can locate the best neighborhoods for affordable property prices and above-average returns. Moreover, you can expand your analysis at the neighborhood level to confirm that your selected market is really appropriate for your aspirations. You can also find rental comps to complete your research and analysis.

Get a free demo of Mashvisor to see how our tools can help you optimize your rental market analysis.

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5 Steps to Conducting an Accurate Rental Market Analysis