As a beginner in the real estate investing business, you’ll come across numerous terms that you don’t normally hear in other industries. Cap rate, cash on cash return, appreciation, leverage, and many others are important real estate terms that you need to familiarize yourself with. In this blog post, we explain one of these important terms that beginner property investors need to know – rental comps (or comparables). Keep reading as we break down everything you need to know about rental comps as a real estate investor.
Note: Visit our blog to learn the ins and outs of real estate investing and the different terminology associated with the industry.
What Are Real Estate Rental Comps?
Rental comps are essentially real estate properties that are comparable or similar to the one a real estate investor is considering. In order to consider a property as a comparable, it has to be similar in terms of:
- Location
- Property type (single-family, multi-family, condo, townhouse, etc.)
- Property size (square footage, number of floors)
- Number of bedrooms and bathrooms
- The age/condition of the property
- Amenities and major features (balconies, verandas, fireplace, garden, swimming pool, etc.)
It’s recommended to find 3-5 comps that were sold within the past 3-6 months within a radius of 1-3 miles from your investment property. But why do you need them?
Why Investors Need Rental Comps
Generally speaking, property investors need real estate comps when buying an investment property or when selling an investment property. This is because comparables are the core of a comparative market analysis which allows them to:
1) Determine the Value of the Investment Property
Before selling investment properties or buying a new rental property, real estate investors need to know its fair market value.
To property sellers, using real estate comparables is important to decide what price to set based on the current real estate market trends.
For property buyers, on the other hand, rental comps are important to decide what price to offer to the seller. In addition, they are more likely to buy the rental property at a reasonable price after comparing the targeted property to similar ones that are listed for sale in the housing market. Thus, comparables will come in handy when you’re negotiating the deal as you’ll have solid numbers and facts. Essentially, comps prevent property buyers from overpaying for the investment property.
To start looking for and analyzing the best investment properties using reliable comps, click here.
2) Understand the Average Performance of the Area
It’s no secret that the location of income properties plays a role in their success and profitability. In order to find the best places to invest in real estate, there are a number of elements property investors need to look at. These include property prices, rental rates, occupancy rates, etc. To perform a real estate market analysis and find such data, you’ll need to use comparables.
Related: How to Perform a Real Estate Market Analysis
Therefore, real estate rental comps are also important to determine the average performance of rental properties in the area. This, in turn, will help property investors predict the level of success or failure of investment properties and whether or not making a purchase in that location is a smart investment decision.
3) Set How Much to Charge for Rent
If you’re already an owner of a rental property, you’ll also need rental comps at some point. For your case, real estate comparables will help you determine the appropriate rent to charge tenants. As a landlord, you don’t want your rent to be so high that it will drive potential tenants away, nor so low that your rental income won’t keep up with your expenses, leaving you with negative cash flow.
Performing a comparative market analysis with rental comps is the best thing you can do to set the right price for rent. As we said, this analysis shows property investors the average rental rate in the housing market. Thus, you’ll have an idea of how much other rental property owners are charging. You can then set your rent based on that data to keep up with competitors in the market and assure positive cash flow.
Where to Find Real Estate Rental Comps
A real estate investor can find rental comps traditionally by hiring a professional real estate appraiser. These individuals are professionals who specialize in evaluating rental properties. As a result, an appraiser is more than capable of telling property investors the accurate value of an investment property in the current housing market. Though this is a good way for finding real estate comparables, getting a home appraisal costs money and there’s a more efficient way – using Mashvisor.
Mashvisor is an online real estate analytics platform that has developed a number of investment tools that aim to help real estate investors (and agents) in their careers. One of these tools is the investment property calculator which does all the analyses and calculations for you. It finds rental comps at two levels:
Neighborhood Level
When we talk about location in real estate investing, we don’t only mean the city but also the neighborhood where you’re searching for investment properties. Mashvisor’s tool will provide you with data for the major neighborhoods in any city of your choice in the US housing market. This data includes crucial numbers like the median property price, rental income, cash on cash return, cap rate, and more.
Not only that but these numbers are provided for both traditional and Airbnb rentals! A real estate investor can also narrow down rental comps by filtering the number of bedrooms and bathrooms, the square footage, budget, and rental strategy to get the most accurate real estate comparables for the neighborhood.
Related: Mashvisor’s Rental Property Calculator: A Guide for Beginner Real Estate Investors
Property Level
Once you choose a neighborhood, you can start searching for specific rental properties for sale. With the investment property calculator, you can start finding and analyzing rental comps (both traditional and Airbnb) and get reliable results.
Another tool for finding income properties is the Property Finder. This tool is highly customized, yet user-friendly and easy to use. It gives real estate investors a list of the best-performing properties in their city/cities of choice that match their search criteria which they’ve filtered.
Do you have a free Mashvisor account? Click here to use our Property Finder and find properties in a matter of minutes!
Moreover, you can download an excel sheet report containing all the comparable listings which you’ve found in your housing market to start your comparative market analysis!
Rental comps are crucial for property investors, whether they’re selling or buying income properties. After all, success in real estate investing is all about making smart investment decisions. If you’re looking for real estate comparables, why not use our investment property calculator to save your time and money? To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.
Do you have questions about Mashvisor? Click here to read our FAQs and learn about our tools.