The Beginner's Guide to Rental Property Analysis

Rental properties are the most common type of real estate properties across the globe. That is because rental properties are generally easier to manage, and most beginner investors choose them as the starting point of their careers.

If you wanted to invest in a rental property, however, how do you make sure that this is the right property to invest in? How do you guarantee that this property will generate a profit or a sufficient profit to at least cover all of its expenses?

Also Read: Becoming a Landlord: The Best and The Worst

This is where rental property analysis comes in. Rental property analysis is a process of analyzing an investment property to determine its viability for renting out and the profitability that it can achieve as an income property.

When doing rental property analysis, there are a number of different aspects, metrics, and factors that you will want to take into consideration. Some factors can directly affect the performance of an income property, while others can be used to measure its performance and calculate its returns.

Here are the most important aspects, factors, and metrics used to analyze a rental property.

Rental Property Analysis: Location

It is said that in real estate investing, location is everything. That statement can be very true in most situations. The location of a rental property is no different.

The location of an income property can directly affect its performance, and it will dictate your marketing strategy and the types of tenants that you want to attract to the property. Investing in rental properties in a college town, for example, means that you have to target either students or faculty members to make the most out of the location.

Rental Property Analysis: Rental Strategy

Choosing the right rental strategy for your income property can either make or break your career. Before starting to rent out your property, it is crucial that you take into consideration the options that are available to you. There are two main rental strategies to use, and they both cannot work on the same property.

Long-term/traditional rental properties
Short-term/Airbnb rental properties

For you to decide between the two, you should use Mashvisor’s rental property analysis tools to see which is the more profitable or optimal rental strategy to use for each property or neighborhood.

Note: Click Here to Use Mashvisor to search for properties based on their optimal rental strategy!

Rental Property Analysis: The Property Type

When you first start learning about real estate, you do not realize the wide variety of property types that exist in real estate. From apartment buildings, through townhomes, to luxury houses, condos, and vacation homes; each type of real estate property has its own advantages and disadvantages for being used as a rental property.

When doing comparative market analysis, the type of the property that you’re investing in is very crucial.

Comparative market analysis should not take all properties in the area into account. Comparative market analysis should only include properties that are similar to your property, which includes the type of the property as well as its size, age, and other features.

Note: Click Here to start searching for rental properties based on their type anywhere in the US!

Rental Property Analysis: Target Tenants

The tenants are the heart and soul of every rental property. A tenant is an individual who is residing on your income property and who pays a monthly/weekly/daily rent in exchange for his/her stay. Perhaps the most attractive aspect of rental properties is that the tenants who are renting the property will be the ones paying off your mortgage and all other expenses related to the property from their own money.

But there are also a number of different types of tenants, and you will need to tailor your marketing techniques and home design to suit the type of tenants that you’re trying to attract.

Rental Property Analysis: Rental Income and Cash Flow

The rental income of an income property is the amount of rent that you receive from your tenants on a monthly/weekly/daily basis, while the cash flow is the amount of actual profit or loss that the property is generating.

The cash flow of an income property is the main indicator of its profitability. The cash flow can either be positive or negative, depending on the amount of money you’re making or losing. To calculate the cash flow, we simply take the rental income value and subtract all the costs and expenses that apply to the property from that value.

Note: Mashvisor provides both rental income and cash flow values for listed properties.

Rental Property Analysis: Vacancy and Occupancy Rates

The vacancy rate of a property is the percentage of time each year that the property is vacant (has no tenants in it). The occupancy rate is, as you might’ve guessed it, the percentage of time that the property remains occupied.

In an ideal situation, the occupancy rate of a property should be 100%. This would allow you to generate a profit from the rental income of the property throughout the entire year.

The vacancy rate is typically calculated as an expense. After calculating the profits that you will make from your rental income and subtracting all other expenses, you can then multiply the amount by the vacancy or occupancy rate to get the property’s cash flow.

Note: Mashvisor provides the Airbnb occupancy rate for listed properties.

Rental Property Analysis: Cap Rate

The cap rate is a metric used to calculate the return on investment of an income property based on its current market value.

The formulate for calculating the cap rate is as follows:

Cap Rate = (Net Operating Income)/Current Market Value) x 100

This metric is an indicator of the property’s profitability. The cap rate value is also expressed as a percentage. It represents the amount of profit that you will make each year in comparison to the actual price of the property at that point in time. The cap rate metric does not take into account the method of financing used, and it will assume that the property was fully purchased with cash.

Rental Property Analysis: Cash on Cash Return

While the cash on cash return is also used to calculate the return on investment of an income property, it is different from the cap rate metric in that it takes into consideration the method of financing. More accurately, the cash on cash return only takes into account the actual cash invested in the property’s purchase.

So, if you purchase a property using 80% borrowed money and 20% cash, the cash on cash return metric will only use the 20% cash in its calculation.

The formula for calculating the cash on cash return is as follows:

Cash on Cash Return = (NOI/Cash Invested) x 100

The cash on cash return value, which is also expressed as a percentage, represents that amount of money that you will make each year out of the total amount of cash that you’ve invested in the property.

Note: Mashvisor also provides the cap rate and the cash on cash return values of listed properties.

Related: Cap Rate vs. Cash on Cash Return

Comparative Market Analysis

Finally, in order to make an accurate assessment of a rental property, you need to compare it with other similar properties in the area. Comparative market analysis is used to compare a single or a few properties to other similar properties in a market to see if these properties are performing better or worse than the market average.

Using comparative market analysis, you can determine which properties have the highest potential in a market by comparing all the different values and metrics.

For example, if you do comparative market analysis and the results show that the average cap rate for that market is 4%, then properties that have a cap rate 7% are properties that are performing well above the market average.

Note: Mashvisor provides you with neighborhood analytics that can help you conduct comparative market analysis with ease.

Bottom Line

Rental property analysis is a crucial step for your investment. When done correctly, you can greatly reduce or even eliminate any risks associated with investing in the property. It allows you to be certain that the property will be profitable, and helps you plan around the property’s stats and different aspects in order to maximize its profits and optimize it for your type of investment.

Also Read: How Mashvisor Revolutionized Cap Rate and Investment Property Analysis

Searching for rental properties has never been easier than now. Using Mashvisor, you can now easily search for rental properties nationwide and obtain all the necessary analytics and data related to these properties. This can save you months of research, property research, and analysis, and you will be able to find the optimal property for your strategy in the optimal location with ease in just a few minutes.

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The Beginner’s Guide to Rental Property Analysis