As a real estate investor, you already know that the goal of investing in rental properties is to generate positive cash flow. In order to do that, investors need to perform a vital task: a real estate rental market analysis.
Real Estate Rental Market Analysis – In a Nutshell
A real estate rental market analysis (RMA) can also be referred to as a vacation rental market analysis, a single family rental market analysis, or an apartment rental market analysis, depending on the purpose of the analysis. Nonetheless, the function of an RMA is simple. With an RMA, a real estate investor is able to learn about the potential profitability of a location and, more specifically, an investment property. How exactly can a real estate investor conduct a real estate rental market analysis? Read our five steps to learn how!
1. Conduct a Neighborhood Analysis
What is the most important factor in all of real estate? You don’t have to be an expert in the field to know that the answer is location. The term ‘location’ is fairly broad. For our purposes, we’re restricting this definition to the neighborhood an investment property is in. Focusing on a property’s neighborhood rather than its city will yield the most accurate results in a real estate market analysis.
The location of a rental real estate investment is paramount to its positive cash flow profitability. There are many features of a neighborhood that can make or break it as a top investment location. These include, but are not limited to, the following:
- Median property prices
- Safety and security
- Average rental rates
- High walkability score
- Good schools, colleges, and universities
- Amenities and attractions (including tourist attractions for short-term Airbnb renting)
- Access to public transportation
When an investment property location features these characteristics, its neighborhood analysis is more than positive. These areas have high tenant demand and appeal and thus lead to lucrative rental income properties.
2. Find Real Estate Rental Comps
Once a neighborhood analysis has guided a real estate investor to a suitable location, the next step is to find rental comps. These properties are key to answering the question of “how to determine market rent?”. Rental comps, short for real estate comparables, are real estate properties that allow investors to obtain important data about a prospective property for sale. Due to their similarity to the desired property for purchase, rental comps will be useful in a rent price analysis.
There are many shared features, aside from location, that rental comps must have to the property of interest. Some common features include:
- Property type (duplex, single-family, townhouse, etc.)
- Square footage
- Number of bedrooms
- Number of bathrooms
- Property amenities
- Days on market (DOM)
- Lot size
The golden standard is to have at least three real estate comparables for a real estate rental market analysis. There are plenty of sources for rental comps out there. “For Sale/Rent” properties, help from a realtor or real estate agent, and local ads will all suffice when searching for comps. Mashvisor’s investment property calculator, however, is the best tool you can use for finding comps.
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3. Compute Rent Per Square Foot
The third step of a real estate rental market analysis is to compute the rent per square foot from rental comps. Square footage is a key parameter to calculate because it dictates the amount of livable space there is inside an investment property. First, investors need to know the square footage and the rental rate of the comps they have selected. Then, simple division will estimate the rent per square foot each property generates. Find the average value for your comps.
While rent per square foot is essential to estimate the rental market rate of a property, it is important to remember that this statistic is influenced by many factors. A property’s location, for instance, will impact both its rental price and square footage. Amenities also play a considerable role in this equation. A property with a pool or outdoor space will have a higher rent per square foot than a property without such amenities. This principle further emphasizes the importance of selecting similar real estate comparables.
To find out if a property has positive rental potential, multiply the square footage of the property by the average rental price per square foot for the neighborhood and comps.
4. Adjust Rental Value
With a baseline of the property’s rental rate estimate at hand, investors must then adjust the rental value. Even with extremely similar rental comps, an adjustment is best to keep the rental rate as accurate as possible. There are two main features to adjust in a real estate rental market analysis: amenities and occupancy rates.
Amenities can alter rental rates considerably. Rental properties with an extra bedroom or full bathroom, for instance, warrant a higher rental rate than those that don’t. While they may vary significantly, a real estate investor should definitely factor in any amenities when estimating the rental yield per square foot of the investment property.
Occupancy rates, and by extension vacancy rates, are just as important as amenities when determining a property’s rent price. Generally, a vacancy of over 11 percent is considered high. High vacancies in a neighborhood or rental comps are a clear indicator not to invest in the selected property. On the other hand, investing in a neighborhood with high occupancy and demand can justify a slight increase in rental yield.
5. Estimate the Cost of Rental Property
The last step of how to do a rental market analysis is to estimate the costs of investment properties. Property prices, like many aspects of real estate, are influenced by a multitude of factors. Location, property, and housing supply all tie in with a property’s demand. Do some research to find out if there are affordable rental properties for sale that will allow for positive cash flow with the local rental rates.
How Mashvisor Can Help with a Real Estate Rental Market Analysis
Conducting an RMA can be hard work, but it doesn’t have to be. To perform the most accurate real estate rental market analysis possible, you’ll need the most up-to-date data there is. For that, you’ll need Mashvisor’s investment property calculator, which is backed by both predictive and traditional analytics. To get your hands on a FREE 14-day trial with Mashvisor and 20% off after, click HERE!