What are rental comps, where can you find them, and how do you use them when investing in real estate?
Table of Contents
- What Are Rental Comps?
- How Do Rental Comps Work?
- What to Consider for Rental Comps
- Are Rental Comps Enough to Make Investment Decisions?
- Where Can I Find Rental Comps?
- How to Value Investment Property in 3 Steps
- Bottom Line
Investing in rental properties can be lucrative as long as you choose your location strategically, buy the right income property, and set accurate rent prices. However, it’s challenging for some real estate investors to determine whether an investment property will be profitable or not.
Thankfully, investors can research the rental comps to help them decide whether or not a certain property will make a good investment.
The term “rental comps” is used in real estate investing and refers to comparable rental listings that you can compare to determine the value of an investment property.
When investing in real estate, wise real estate investors will not only look at and analyze any rental property that they believe to be a profitable investment. Instead, they will look at a number of rental properties that are similar to one another, then compare them in order to know what the average rental performance is in an area.
Analyzing the rental comps allows investors to identify apartments that show a higher-than-average performance, for example. It is the reason why it’s essential to know how to find rental comps and how to use them to be successful in real estate investing.
What Are Rental Comps?
Rental comps are a method of comparing rental properties in a select area to come up with conclusions about the performance of that rental market.
When comparing long term or short term rental properties in an area, your rental comps should only include properties or apartments that are similar in size, number of rooms, and other features.
So, when looking how to find rental comps near me, one thing I do is that I choose houses and apartments based on their zip code. By using zip codes as a reference, you can more easily group up properties in a specific area such as a neighborhood or street.
Unlike other types of real estate analysis techniques, rental comps focus on the current performance of a very specific market. Other types of analysis try to predict the future performance of a property or a market.
Traditional Rental Comps
In the world of real estate, there are two main types of rental properties. It means that for the purpose of doing rental comps, you will need to adjust your methodology and property selection based on the type of rental strategy you want to use.
Traditional rental properties are the most common type of rental houses in real estate. Tenants who live in traditional rentals lease them on a monthly basis and can rent them for several years. Another name for this strategy is “long-term rentals”.
Since it is the most traditional and common type of rentals, it is used as the baseline when talking about rental comps. It is why rental comps will typically focus on monthly or yearly rental income, unlike short term rentals, as we will see next.
Airbnb Rental Comps
Short term rentals, which were popularized by platforms like Airbnb, have gained a lot of popularity in recent years. Nowadays, real estate investors are as likely to invest in a short term rental as they are to invest in a traditional long-term rental property.
Although short term rental properties are considered riskier and more volatile investments, their potential for profit can potentially be considerably higher than traditional rental properties. However, it also means that doing rental comps for short term Airbnb properties can be more challenging for a number of reasons.
Firstly, since Airbnb properties are rented out on a short term basis and have a high tenant turnover rate, their future performance can be difficult to predict with accuracy.
Additionally, Airbnb rental properties don’t have a fixed rental rate, and hosts will often adjust their rates depending on seasonality and demand.
Finally, when considering how to find rental data about houses and apartments, short term rental data is extremely limited on the MLS, which is the typical source of data in real estate.
Luckily, there are lots of tools and websites that can help you, such as Mashvisor and Zillow, as will be showcased later.
How Do Rental Comps Work?
Rental comps are an essential real estate investing tool that compares the rental income from similar properties with the same features within the same neighborhood or any specific area. Typically, rental comps come in an Excel sheet or a table format to allow for easy comparison and sorting.
Analyzing an income property and knowing how to run rental comps can help investors determine the ideal rent prices in a particular location. More importantly, it can also provide a general overview of how much cash flow and income an investment property can realistically generate.
When looking at rental comps, you should notice that the rental properties that are being compared are similar to one another in certain aspects. However, the features can differ from one source to another because no two (or more) properties are exactly alike.
Similar or Comparable Properties – What Does It Mean?
In general, to use rental comps as a tool, you will compare these properties based on their distance from one another (or the neighborhood that they are in).
Also, the property type, size, the number of bathrooms, and most importantly, the number of bedrooms should be considered.
For example, if you’re looking at a three-bedroom two-bathroom rental property and you want to get rental comps to compare it to, the properties that the comps will consist of will almost always have the same number of bedrooms. Also, they will always exist in the same area or neighborhood.
However, although the number of bathrooms and property size are also being considered, they are not really the main priority.
Usually, rental comps will not limit the comparable properties to those that have the same number of bathrooms or size as the subject property. In cases like this, adjustments are made to factor in the differences in comparable rentals, including the number of bathrooms, the age of the appliances and furniture, or the size of a garage or carport.
What to Consider for Rental Comps
The main purpose of using rental comps is to compare similar properties so you’ll get an idea of how much income an investment property can most likely generate. But what exactly are you comparing?
Depending on the investment strategy that you’re using, you will want to compare the metrics that are most important to your investment.
If you’re looking to invest in a rental property, the metrics that are most relevant to you will be the rental income, the listing price, and the occupancy rate.
Also, depending on your rental strategy, you might want to use rental comps that show the nightly rate for short-term or Airbnb rentals, or the monthly rate for long-term or traditional rentals.
So, the rental comps that you will need should include those details as well as the necessary property details, including the number of rooms, size, distance, and other available facilities.
Essential Property Details When Comparing Similar Listings
The best rental comps should include comparable properties that have close similarities to your subject property. It is why it’s important to know what details you need and how to get rental comps properly so you can make an accurate comparison that can help you with your investment decision.
Here are the essential property details that you need to include in rental comps:
Make sure to include the specific location—an exact neighborhood, street, or village. While some investors just go online to search “rental comps near me,” indicating the precise location of your subject property can generate more accurate results.
As I mentioned earlier, using zip codes can help you limit your search to specific neighborhoods or streets, and MLS listings will typically have their zip codes available.
However, zip codes might not always be available, such as if you’re comparing off-market properties that aren’t on the MLS.
In this case, you can use street names and specific addresses to pinpoint properties and group them up based on their location.
Property Market Value
Property market value refers to the value of the property when sold—it allows you to check whether the income property is priced correctly. Also, it enables you to calculate your potential cash on cash return and cap rate.
Keep in mind that you will need an updated and current market value for the houses or apartments that you want to compare.
The data on the MLS is typically up to date, but other data sources such as Zillow might not be completely accurate. Also, websites like Airbnb don’t include such information about their short term rentals.
If you’re looking for a way to find accurate and up to date data online, you can sign up for a free trial and use Mashvisor’s website to get data on short term and traditional rental properties.
The rent prices or rental rates of the property is the key stat that you want to keep track of in your rental comps. It can be expressed through monthly or yearly rental income, or the daily rate if you’re comparing short term rentals.
Additionally, investors typically use the rent per square foot metric to compensate for any differences in the sizes of houses and apartments you’re comparing.
Comparing properties of similar size, or at least with sizes that are close to your subject property, can give you a more accurate analysis.
In some cases, the size of the lot is also taken into account as the area around the house can be utilized to produce more income from the property.
Smart investors will often use areas such as frontyards and backyards to build utilities or even expand the property to accommodate more people.
As mentioned above, using the rent per square foot metric combines both rental income and property size in your comps.
When looking at rental comps, the property type should be considered. If your subject property is a single-family home, you should not compare it with an apartment building or a multifamily home.
Number of Bedrooms
As mentioned, the number of bedrooms is one of the most essential metrics used when comparing similar listings. Consider rental comps that have the same number of bedrooms as your subject property.
Number of Bathrooms
While it is not the main priority in making a comparison, the number of bathrooms can also be considered.
Also consider the type of parking spaces, whether a property comes with a garage, carport, or on-street parking. Being able to access street or private parking areas can significantly improve the value of a rental property, so keep that in mind when doing rental comps.
The parking area can be utilized as either a free or paid parking space to either increase the demand or income of the property.
Rental comps may also include other amenities being offered, including the appliances (and how new or old they are), whether it is pet-friendly or not, landscaping, upgrades or improvements, play area, swimming pool, and other amenities available.
If you’re doing rental comps for a short term rental strategy, you’ll want to consider the effect of the amenities on the seasonality of the property. For example, if you’re comparing properties with a swimming pool, such an amenity will only increase the value of your rental during the summer season.
Also, amenities are great to use for marketing and advertising your rental on the Airbnb website or other similar websites, as they’re often seen as the biggest appeal of a property.
Condition of Property
The general condition of the property, especially its construction date, should be taken into consideration when comparing similar listings. It is especially crucial if you’re trying to find foreclosed or distressed properties that you want to renovate.
In such a case, you must be able to assess the reparation or renovation costs as they will make up a good chunk of the overall purchase price.
Since the MLS doesn’t include off-market distressed properties for sale, if you’re looking how to find foreclosures information in a specific area, Mashvisor is a great website to do so.
Are Rental Comps Enough to Make Investment Decisions?
After obtaining your list of rental comps, you will want to compare the investment properties based on the area’s average performance. It will help you identify those income properties with above-average stats.
For example, you’re looking at rental comps and you see three properties that are similar in most aspects. However, one of the properties shows a higher-than-average rental income while its selling price is at the average rate.
This particular property will obviously be the better choice. But it isn’t always the case.
While rental comps can give you an excellent starting point when searching for an investment property to purchase, it is by no means sufficient to base your entire investment decisions on.
It is because sometimes, a property might look great on paper because its listing price is lower than average, and its rental rate is average or above average.
However, upon further inspection, you might discover that the listing price of this particular property is low because it is in a poor condition and will need heavy renovation work before it can be in an operational state to generate the maximum amount of rental income.
So, rental comps are more of a supplementary step that can make it easier for you to determine the value of rental properties to help you make a decision.
It can give you a general overview of the properties’ performance so you can narrow down your options when considering investment properties.
This will save you a lot of time that you would otherwise spend on analyzing properties with a lower-than-average performance.
Where Can I Find Rental Comps?
If you’re a new investor, you might be asking yourself, “where can I get rental comps in my area”?
Fortunately, there are a number of ways to access rental comps.
Traditionally, you would need to drive around the neighborhood and collect information about each property, create a spreadsheet, input all the information that you need, and then compare the properties.
Nowadays, however, you can work with a real estate agent, property manager, leasing agent, and even your fellow investors to get rental comps.
You can also find online sources (such as Zillow rental comps) to obtain comparable listings. Remember that such options will require you to pay a certain fee. The additional expense will be worth it if you’re getting more information about the investment property aside from just rental comps.
However, some platforms charge high fees but offer only a few services.
The best websites to find rental comps online include the following.
Although access to the MLS is restricted to licensed agents and realtors, the MLS is considered the main source of data for real estate investors in the US.
It means that even if you’re not directly accessing the MLS, you will want to find websites and sources that use up-to-date data from the MLS in order to get the most accurate results.
In case you’re wondering what is the MLS, it is the Multiple Listing Sites that licensed agents use to keep track of all movements that happen in the world of real estate.
Whenever a buyers’ or a sellers’ agent closes a deal for a client, they update the information on the MLS related to the real estate property that was subject to the deal.
As an investor, if you’re working with a licensed agent, you can ask them to provide you with comps from the MLS, but keep in mind that agent services aren’t for free.
One of the most popular online sources for real estate data and comps, Zillow’s website is an excellent resource for investors who are looking for large amounts of free data.
Although their data is not always up to date or accurate, the market insights and other details that Zillow provide about their listings adds great value to any investor.
The biggest downside of using Zillow, however, is that it can feel overwhelming to beginner investors. It is because of the sheer amount of data that will be shown, which won’t all be relevant.
Professional investors, on the other hand, know which data is valuable and which not, but will sometimes criticize Zillow’s data for its inaccuracy in some cases.
If you’re looking for a more reliable, flexible, and easy-to-use source for rental comps, Mashvisor is an excellent option. It is an online platform that provides real estate analytics, projections, as well as comps for investment properties that you can turn into rental properties anywhere in the United States.
Mashvisor provides access to rental comps that you can easily download using the Export Neighborhood Report functionality.
You can also set a number of filters to customize the type, size, age, and many other features of the properties that you want to compare. Then, you can download a CSV file containing all the details and info that you need about these properties so you can compare them accurately.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
What Makes Mashvisor a Top Choice for Finding Rental Comps
By going to any neighborhood analytics page on Mashvisor’s platform, you can find a rental comps section that will show you properties that are similar to one another within that neighborhood.
The section includes the ratings of the rental properties, as well as their occupancy rates, average rental income stats, and other necessary information so you can make a good comparison.
One of the best features is that Mashvisor’s algorithm will look at each property’s details and draw a comparison on your behalf.
As you can see in the screenshot below, the comps will include a similarity score based on all the data we have available from the MLS and elsewhere.
Finally, if you visit any property’s page, one of the several features that you will see on that page will be a table of similar properties in that area and their information.
The comps include details such as previous sales, which can be used for planning your rental strategy or even for selling your property to see what the competitive prices are in that area.
While the data isn’t offered for free, it is an invaluable asset for investors who are looking to make quick decisions using our website.
Do you have questions about Mashvisor? Click here to read our FAQs and learn about our tools.
How to Value Investment Property in 3 Steps
It’s important to emphasize that rental comps are not enough for analyzing your future investment on their own.
In order to get the most accurate projections and secure your financial future, you want to make sure that you formulate a solid plan based on accurate calculations and analysis. It means that rental comps are only a tool to help you in how to find the right house or apartment to buy in a specific area.
But to understand whether that property will be profitable or not, you will need to analyze its future return on investment, which rental comps can’t do.
So, to analyze your investment, there are certain steps that you should take. Some of them can be taken before doing the comps, depending on your strategy and planning.
Step 1: Rental Market Analysis
A market analysis is typically the first step in analyzing your investment and determining the value of an investment property. It is because the value of a property depends on the market that it’s in.
Rental comps are sometimes considered part of the market analysis, as both types of analysis rely on comparing properties and determining averages.
A market analysis, however, is a much broader term, and it doesn’t necessarily focus on a small area like comps. Instead, it is meant to give the investor an idea of the general performance of a city or district based on property prices and market direction (buyers’ vs sellers’ market).
Most investors look at different markets’ analysis before choosing the market in which they want to invest. The decision-making process can either depend on the house prices compared to your available budget, the rental rates compared to your desired outcome, or a combination of both.
Of course, there are plenty of websites and sources that typically provide free forecasts about the performance of different markets across the US.
Check out Mashvisor’s 2022 Real Estate Market Forecast to learn more.
Step 2: Cap Rate Analysis
After running comps and analyzing the market, investors will typically do a cap rate analysis.
The capitalization rate is a metric that is used to calculate the rate of return on investment of rental properties. The cap rate is an easy-to-use metric for analyzing properties and markets alike, and it can even be used in comps.
To calculate the cap rate, all you need to know is the net operating income of a property and its price. By using the said information, you can learn how much the rental income of a property makes up of its total price, and how long it would take the property to generate that amount in profit.
The formula for calculating the cap rate is as follows:
Cap Rate = [(Net Monthly Income x 12) / Property Price] x 100
While it is mostly used for analyzing individual properties, the same logic can be applied to a market or used in comps to get an idea of a market’s potential for returns.
Although the MLS doesn’t provide data on each listing’s cap rate, Mashvisor’s platform takes data from the MLS and uses it to calculate the cap rate for each property and market.
Step 3: Cash on Cash Return Analysis
Similar to the cap rate, the cash on cash return is another metric that is used for projecting the return on investment that a property can potentially generate.
However, the main difference is that while the cap rate relies on the property’s market value, the cash on cash return is more personal and relies on the amount of cash that you specifically will pay out of your pocket.
For this reason, unlike the cap rate, the cash on cash return isn’t an efficient metric when it comes to using it in comps or analyzing markets. However, it is very useful in helping you make the final decision once you’ve figured out your finances and you have a couple of properties to choose from.
To find out what the cash on cash return rate is for a property, you take the cap rate’s formula and you replace the property’s price with the amount of cash you’re paying:
Cash on Cash Return = [(Net Operating Income x 12) / Cash Invested)] x 100
Of course, it means that if you’re using a mortgage or borrowing money to buy the house, you will only include the amount of down payment and closing costs that you must pay in cash.
Using rental comps as part of your investment property analysis can be beneficial. This is because it helps you understand the potential of properties in each street or neighborhood.
It’s also an excellent way to forecast tenant demand in an area. This will ensure that you’re investing in a house or apartment that will realize a high occupancy rate. Additionally, it can also help you decide how much rent to charge without going overboard with your rate or undercharging your tenants.
In general, rental comps are a great way for you to find investment properties in an organized and efficient manner. Comps allow you to narrow down your search and cut through large numbers of houses that aren’t worth your time.
By identifying a few investment properties that have performed well in their neighborhood, you’ll be able to further your analysis. You easily determine the one that would make a good investment.
Using a website like Mashvisor will give you access to different types of rental comps. Also, you will also be able to use a large selection of tools and features throughout your investment journey.
In a sense, Mashvisor is a very useful website for all types of real estate investors. Whether you’re searching for a property or closing the deal.
Furthermore, it is also a helpful tool for monitoring the performance of an investment property. You could even see how it compares to other properties in the same area.
If you’re looking to find a house or apartment, Mashvisor’s database includes listings from the MLS. You can even give it a try for free.
To start using Mashvisor, sign up for a 7-day free trial today, followed by 15% off for life.