Rental Market Analysis Class 101
When you look at all there is to learn in the real estate business, you catch yourself with a list that could go on for years. One aspect of real estate that is part of that “long” list is a rental market analysis.
A rental market analysis helps you to assess the rental property potential of the area of real estate you are investing in. Broadly speaking, a rental market analysis requires you to figure out the adjusted price (per square foot) of real estate comps, and then multiply that value by the square feet of each investment property for sale.
Then it’s analyzing time. If you find that the average rent is higher than the average price of rental properties on the market, the rental market is considered positive. Let’s get down to the details of a rental market analysis.
Everything Has a Purpose
We all like to believe that there is a purpose to all things in this world. The same idea accounts for everything in the real estate world. So what is the purpose of a rental market analysis?
Similar to a residential real estate property analysis, a rental market analysis evaluates key factors that aid in determining the potential of a rental property or the area it’s located in. Majority of the time, a rental market analysis is used for a long-term rental or vacation rental investment analysis report. It does not, however, work for fix-and-flip properties.
Real estate investors and landlords like you use this market analysis tool to assist them on the journey to finding a suitable U.S. real estate market. With a rental market analysis, rental property investors take a look at:
- The average rents in the area
- The average monthly investment property costs in the area
A comparative method of valuation is then used to compare one rental property in the area to another rental property in the same area. You want to aim for a “positive” rental market analysis. By positive, we mean that the average rents in the area are higher than the average costs. A positive rental market analysis indicates investing in a rental property in that area should lead to positive cash flow each month.
Now you can understand just how important a housing market analysis is. Its purpose serves a great deal of importance when it comes to the money flowing into your pocket. Positive cash flow=making the Benjamins in real estate investing, so stay on the lookout.
…But How Does It Work
We’re going to be as general as possible when we talk about how a rental market analysis works in this blog. We want you to get an overall idea, to begin with, and then we’ll come through with the nitty-gritty details. No matter the use of the rental market analysis, they are all carried out pretty much the same way.
#1. Pick your potential neighborhood-complete a neighborhood analysis
#2. Identify AT LEAST three real estate comps & figure out what their monthly rental rates are
Related: How To Easily Find Real Estate Comps
#3. Divide each one of those real estate comps’ monthly rent by the individual price per square foot. This will give you the average rent in the U.S. housing market area you are in.
#4. Lastly, calculate the monthly costs of investment properties that are also for sale in the area. This allows you to get an idea of what your monthly cash flow will look like.
Quick Tip: If you already have your eye on one income property in specific, then just use it’s investment property costs instead of the average of the available rental properties.
Users of Rental Market Analysis
We know that real estate investors are the “main customers” when it comes to this rental method of valuation. This is a formal tool that really involves some time and real estate market research. Rarely do you find typical people who simply want to rent out their residencies.
A rental market analysis applies to a range of types of real estate investment. Anywhere from a duplex home to a single family home, but minus the fix-and-flip rental properties. Real estate investors normally use a rental market analysis to make real estate investment decisions. Another one of the real estate investment tools real estate investors use to find the most profitable investments is Mashvisor.
Mashvisor provides you with real estate investment analysis software like no other. The platform gives you a glimpse of the important real estate investment analytics like cash on cash return, cap rate, rental income, and Airbnb occupancy rates. Not to mention the real estate comps we can provide you so you can stay on top of your rental market analysis game.
With Mashvisor, you will be able to gain the confidence you need to make those important real estate investment decisions. Say hello to positive cash flow with the help of Mashvisor and your personal real estate investor expertise.
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.
Rental Market Analysis on the Go
Let’s go over how to do a quick rental market analysis. Let’s say you need to do a residential market analysis quickly, and you’re lacking the time to do a full-blown rental market analysis.
To do an “edited” rental market analysis, you need to get to know what your real estate comps are charging for rent. In addition to that, you should get an idea of what amenities they have, occupancy rates, and investment property costs. So how can we do all that in short time?
Make a Few Notes
Since you’re unable to do a full-blown neighborhood analysis, take some notes on the area instead. In your notes, include the property’s amenities, comparable rents, and occupancy rates.
Follow the Rule of Thumb of Rental Market Analysis
The 1% rule is iconic in the real estate business. You should be charging rental rates that amount to at least 1% of the rental house market value. The rule of thumb, however, can be a bit much in some cases.
So you can aim for a .5-.8% value instead of a whole 1%. This means if you purchase an investment property at $600,000, you would charge rental rates between $3,000 to $4,800 every month. Act accordingly and go with your gut. You will know what to do.
Related: How Much Should I Charge For Rent?
Quick Rental Market Analysis in Action
Now, this does not mean every one of your rental market analysis reports should be quick! This is just when you’re short on time and want an overall idea of what the numbers look like.
There are many more factors that should be considered in a detailed rental market analysis. The main factors to consider in a quick housing market analysis should be real estate comps, occupancy rates, and property amenities.
Take That For a Crash Course in Rental Market Analysis
Sometimes in the real estate business, you have to take the crash course route when you can’t sit in a classroom. Here, we tried our best to cover the basics of a rental market analysis.
With this crash course in the comparative method of valuation, you’re getting the main point down so you have time to get into the details later. Don’t worry, we have plenty of “courses” that can give you the inside outs of a rental market analysis.
The main takeaway here is that a rental market analysis is crucial to your investment property’s success potential. With this market analysis tool, you can determine the fair rental value of your investment property unit. Comparing all the different real estate comps and taking the factors we talked about into consideration will have you end up with an effective rental market analysis.
Set the price that will cover investment property costs, and attract both renters and rental income. Positive cash flow is the goal, and with a rental market analysis and Mashvisor’s real estate performance metrics, you will achieve that goal.