Investors always expect to see returns from their investments. Rental property comps can help them navigate through the different complications.
Table of Contents
- What Are Rental Comps?
- How to Find Rental Comps
- Where to Find Rental Comps
- Use Mashvisor to Find Rental Property Comps Within Minutes
Price is like a magnet for buyers and renters; the lower it is, the stronger its pull. However, a property’s price is usually based on demand and supply, and getting the right balance can be a major headache. This is why you need rental comps.
As a landlord, there may be an urge to charge the highest rent possible in your area, especially if you’ve made upgrades to your property. However, you need to properly understand the valuation of comparable properties in your location before you stamp a rent value.
There are different methods of finding rental property comps. They range from using artificial intelligence to the more traditional method of making inquiries from real estate agents and property managers.
In this article, you’ll learn how rental comps work and how to best analyze them to make the most of your rental property investment. Let’s get to it!
What Are Rental Comps?
Rental comps refer to the analysis of rental properties with similar features within a given market. It is used to forecast the fair market rent and the potential cash flow of the property.
The purpose of rental comps is similar to comparative market analysis, which is used when determining the price of a property. Before the emergence of online tools, the process of getting rental comps could take months as information needed to be sourced through more tedious processes.
Nowadays, real estate websites like Mashvisor help you compile and assess rental comps within minutes.
What Should a Rental Property Comp Include?
In addition to location, square footage, and building style, what other important features should rental property comps include?
First of all, property rent should be included in rental comps. You can get the figure from MLS data, property managers, and local real estate agents. Rental comps should include the fair market value of the properties. The market value is used to calculate key performance metrics, such as cap rate, cash on cash return, and gross rent multiplier.
Other pertinent details to include in rental property comps are rent per square foot, property size, number of bedrooms, number of bathrooms, parking spaces, outdoor facilities, and electrical appliances in the property.
Rental comps should also include information about the property’s construction date, condition, recent upgrades, and proximity to public amenities.
When Do You Need Rental Property Comps?
Rental property comps are traditionally used when trying to sell a home. You can use comps to accurately estimate your home’s market value, track shifts in the real estate market, and make smart upgrades. For potential landlords, here are some of the use cases of rental comps:
1. Estimate Rent and Rental Cash Flow
Before buying a rental property in an area, you should know the area’s investment potential. Through rental comps, you gain a solid understanding of the real estate market in your neighborhood. It helps your decision-making and informs your ROI projections.
For example, if the rent for properties similar to your subject property is between $1,000 and $1,500, you would want to charge a similar amount. Consequently, you can make accurate projections of rental cash flow.
2. Estimate Tenant Turnover Rate
The tenant turnover rate is computed by dividing the number of tenants who moved out during a period by the total number of tenants in the said period.
As a real estate investor, you should know that every tenant turnover adds to your costs. Therefore, you should be concerned about the tenant turnover rate of rentals within a specific location.
Knowing the average turnover rate within a location can help you efficiently manage turnovers in your rental property and minimize turnover costs. If you want to figure out how often tenants are moving in and out of a location, a rental comp can provide the information you need.
3. Determine the Right Rental Property Values
There are different approaches to valuing rental property. They include sales comparison, which requires comparison against similar properties to estimate the sale value.
Another approach to valuation is to determine the cap rate, i.e., the ratio of net operating income to property value. You can also determine a rental property’s value by estimating the cost of reproducing or replacing the home.
When you want to correctly estimate the value of rental properties in a particular area through any of the above methods, you can search through local MLS rental comps.
4. Track Market Shifts
As a real estate investor, keeping track of the trends and forecasts in the real estate market is crucial to making the right decisions. Although general economic factors may affect the national real estate market, local factors influence market shifts locally.
Through rental property comps, you can monitor the different real estate market changes in a neighborhood. By tracking the market shift, you can also correctly assess the rental potential of that location.
5. Make Smart Upgrades
When you want to make high ROI home improvements to your rental property, carrying out rental comps is advisable. For example, if homes with remodeled kitchens in your neighborhood charge higher rents or sell for a higher price, it’d be wise to make such an upgrade to your own property.
How to Find Rental Comps
Below is a step-by-step guide on finding rental comps:
1. Compile a List of 5 or More Properties
To find rental comps, start by compiling a list of at least five comparable properties. Effective rental property comparative analysis can only be achieved from similar properties.
Fair market rents differ from one neighborhood to another and, sometimes, from one street to another. It also differs from one property to another based on the features of each property.
A rental comp will be useless if you don’t compare properties with sufficient situational similarities.
2. Evaluate and Compare Property Features
After compiling a list of properties, you need to evaluate and compare the features of the properties. Generally, the properties on the list will share similar characteristics, such as being in the same school district, with the same number of bedrooms or bathrooms, and being in close proximity to public services.
However, you’ll still need to evaluate them based on more basic characteristics, such as interior and exterior decor, age of the building, and level of upgrades. Also, take note of the building finishes, additional outdoor spaces, and architectural styles when evaluating rental comps.
3. Determine the Fair Market Value (FMV) of Each Property
The next step in finding rental comps is determining the fair market value of each property on your list. The FMV is an estimate of the price that a property would be sold for on the open market.
A property’s fair market value depends on its selling price, the prices of real estate comps, and the asset’s replacement cost, as well as the opinion of experts.
4. Determine the Fair Market Rent (FMR) of Each Property
To find rental comps, you need to know the fair market rent of each property. In a particular real estate market, the FMR is the estimated expected rent for a property. Essentially, it is different from the current market rent, which describes the rent that can be negotiated in a free and open market for a property.
Knowledge of the fair market rent of comparable properties will give you a thorough understanding of how much rent your property can command. Also, if your property is already rented out, rental property comps help you determine if your rent is too low or too high.
Rental comps will help you assess your property using the 1% or 2% rules. The 1% rule states that a rental property should generate a gross monthly rate that is at least 1% of the property’s value.
On the other hand, the 2% rule in real estate suggests that a rental property is a potentially good investment if its monthly rental income is equivalent to or higher than 2% of the investment property’s price.
When either of the rules is applied, you can compare the results with that of similar properties.
5. Calculate the Cap Rate or Cash on Cash Return
Now, you’ll need to assess the rental ROI of each property on your comparables list. Note that the properties should be similar to yours in feature and function. That is, if yours is a single family rental with three bedrooms in a particular neighborhood, you should ideally be looking at single family rentals that fit the same criteria.
The cap rate and cash on cash return are two useful measures of the profitability of an investment property. The cap rate is defined as the ratio of the net operating income of the property to the property value.
Cap Rate = Net Operating Income / Property Value
Where: NOI in a Calendar Year = Total Revenue Generated – Total Incurred Expenses
The cash on cash return rate is defined slightly differently as the ratio of net cash flow to the cash invested.
Cash on Cash Return = (Annual Cash Flow Before Taxes – Debt Payment) / Total Cash Invested
6. Find the Gross Rent Multiplier
In property valuation, the Gross Rent Multiplier (GRM) refers to the ratio between a property’s value and gross rental income. It is a measure of the profitability of a rental property.
GRM = Property Value / Gross Rental Income
For example, if a $150,000 property generates a gross rental income of $14,400 in a year, the GRM will be:
$150,000 / $14,400 = 10.4
When comparing properties, the property with lower GRM is the less profitable one.
7. Assess the Numbers
The figures alone cannot indicate how excellent or poor a rental property investment is. You can see the true picture when the data are compared against each other.
The last step in doing rental comps is to rank the numbers from your subject property against the numbers of other rental properties.
Where to Find Rental Comps
You can find rental comps through the following:
1. Zillow Rental Comps
Through the Zestimate feature on Zillow, you can get rental comps. The Rent Zestimate is Zillow’s estimate of a property’s rent based on available data.
There are over 168 million homes listed on Zillow and more than 115 million houses with Zestimates. Zillow takes into account the physical features of each property and provides updated data on each property.
2. Real Estate Agents and Property Management Companies
Real estate agents and property management companies are the main offline sources for free rental comps. The agents and companies usually possess first-hand information about what landlords charge for rent. They are also knowledgeable about the features of similar properties available in your area.
Additionally, expanding your network by becoming involved in a local real estate association is a very effective way to obtain information about local rental comps.
Rentometer is another quick and easy way to get rental comps. With Rentometer, you can compare the rent of your rental property to the rent of similar properties in your area.
With Rentometer, you can choose between a free plan with seven days of free access and a paid plan based on how much analysis you need.
By using Mashvisor’s real estate investment tools, you can access data on millions of properties listed on the platform. You can use the platform’s Rental Comps and Insights feature to assess similar properties in your neighborhood.
It’s possible to analyze traditional and Airbnb listings with Mashvisor’s tools, which can be helpful in formulating an investment strategy. Our data accuracy is unparalleled because we draw from the most reliable sources: Airbnb, Zillow, and other MLS.
Use Mashvisor to Find Rental Property Comps Within Minutes
When investing in a rental property, the first step is to find rental comps. Rental property comps provide information that will guide your decision to invest.
What better place to get rental comps by zip code than on Mashvisor? By integrating data from multiple real estate listing services across the US, it can provide the necessary rental property comps within minutes.
Click here to start a free 7-day trial of Mashvisor, followed by 15% off for life.