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Rental markets are a good source of income for people who own their homes and don’t want to be landlords. The rental market analysis will tell you what the current state is, how much it pays out, and the best ways to get into this lucrative business without breaking your budget.
The “free rental market analysis” is a report that includes the current state of the rental market. The report will help you decide whether or not to invest in your own property.
A rental market analysis (RMA) aids investors in determining a location’s rental potential. Typically, you multiply the adjusted price per square foot of comparables by the square footage of the properties for sale. The rental market is good if the average rent is greater than the average price of available homes.
You’ll need an investment property loan to buy one of the available properties for sale once you run an RMA and determine that a rental market is a suitable place to invest. Visio Lending can help with this. They provide top consumers with a 30-year investment property loan with a straightforward pre-qualification procedure and low rates.
Visit Visio Lending for more information. for more information.
What is a Rental Market Analysis and How Does It Work?
To do a good rental market study, you must first understand how it operates. It’s a formal rental market prediction that considers a variety of elements to assist you in determining the rental potential of a certain location or property. Long-term or holiday rentals, but not fix-and-flip homes, need an RMA.
It is used by real estate investors and landlords to determine whether or not a given region is suitable for a rental property. Investors seek for typical rentals in the region and compare them to the average monthly prices of rental properties in the same area in this example. If the rental market analysis is favorable (i.e., average rents exceed average expenses), a rental investment in the region should provide positive monthly cash flow.
Purchase and hold It is also commonly used by investors when determining the rental price of a current or future investment property. For example, if they undertake a rental market research before to purchase the property, they may be able to avoid purchasing a property that is underperforming and losing money.
An RMA is handled in the same manner regardless of the purpose. After you’ve chosen a possible area, you’ll need to find at least three comparables and calculate their monthly rents. The average rent for the region is calculated by dividing each of the comps’ monthly rent by their respective price per square foot. Finally, determine your estimated monthly cash flow by calculating the monthly cost of houses available for sale in the region. If you have a particular property in mind, instead of using the average of available properties, utilize the cost of that property.
What is the Purpose of a Rental Market Analysis?
A rental market analysis (RMA) is often used by investors and not by those who merely wish to rent out their main property or a room in their home since it is a more formal technique that requires study and effort. An RMA is often used by investors to make an investment decision before purchasing a property, although it is seldom utilized by fix-and-flippers.
Any property type, from a single-family house to a fourplex and beyond, may benefit from a rental market study. Check out our post on establishing a rental pricing whether you want to Airbnb your home or simply rent out a room in your house for some additional cash. Otherwise, continue reading for additional details on how to do a rental market study.
5 Steps to Conducting a Rental Market Analysis
A rental market study consists of five distinct phases. Finally, you should have a better grasp of the area’s typical rentals and monthly costs of rental units. This should inform you if your current or projected investment will provide a positive cash flow.
The five phases to doing a rental market study are outlined below.
1. Assess the Environment
Because you must first examine the region in general, the first phase of an RMA is to evaluate the neighborhood via rental market projection. You should always double-check that the neighborhood you’re considering is a decent one. It’s not as easy as stating that you want to purchase a home in a “nice” area, since that is subjective.
Instead, check to see whether your ideal neighborhood or location has special features that can help your home value and attract tenants who will hopefully respect it and pay on time. A neighborhood doesn’t always equal to a certain dollar number for rental prices, but it might help you decide whether or not you want to buy a home there. You should be able to reply “yes” or “no” to whether this is a good community to invest in at this point.
When analyzing a neighborhood, consider the following factors:
- Availability of public transit and/or parking
- A high walkability rating
- Local private and public school ratings are excellent.
- Parks, libraries, and cultural venues are just a few of the nearby facilities and activities.
- Dining and shopping are both conveniently located.
- You don’t want to purchase in a vacant neighborhood unless you know it’s being developed, so look for businesses that are open.
When picking a neighborhood, stay away from the following:
- On one block, there are a number of deteriorated or unoccupied homes.
- There are a number of enterprises in the commercial area that are permanently shuttered.
- Areas with a lot of noise, such as those near a factory, a police station, or an airport
- Avoid neighborhoods with a lot of potholes, disintegrating sidewalks, and out-of-service streetlights.
Keep in mind that you’ll want to buy an investment home in a neighborhood where you’ll feel comfortable meeting contractors and collecting rent. Tenants should desire to reside in the neighborhood because it is clean, safe, close to facilities, and convenient to get there, among other things. You can’t modify a neighborhood’s curb appeal, but you can improve the curb appeal of a single house.
2. Look for properties that are similar.
Start looking at the rentals of three similar homes once you’ve gotten a sense of the surrounding area and what you should avoid. We’ll alter these similar rates later depending on amenities, but for now, let’s concentrate on finding comps so we can calculate the area’s average rent.
How to Find Rental Properties That Are Comparable
To begin, we must understand how to evaluate rental properties in order to determine which are comparables (comps) and which are not. Comparable homes will often be in the same area, school district, and size range (based on square footage). They should be in comparable shape as well.
When comparing rental homes, keep the following in mind:
- They should be within a three-block radius in an urban region; a suburban area should be within a couple of miles, and a rural location may be even farther out.
- Square feet: Should be within a few hundred square feet of each other.
- Number of bedrooms: Must be equal; don’t compare a one-bedroom to a two-bedroom apartment.
- Number of bathrooms: They should be comparable; don’t compare a one-bathroom home to a two-bathroom one, but two and 2.5 bathrooms are OK.
- If you’re buying a single-family house, the size of the lot is crucial.
- Condition: Must be in the same category as other items, such as updated, original, distressed, and so on.
- Facilities: If the apartment and building have similar amenities, you may adjust for them.
- Days on the market (DOM): If a property has been on the market for more than 60 days, it may be overpriced or have a defect. Depending on why the DOM is so high, you can normally decrease the price down by roughly 5%.
Where Can I Find Comparable Property Information?
Property data that is comparable is often simple to find. You may use Zillow to look for rental listings in a certain zip code or area. You may also inquire about similar rental homes by calling a local real estate agent or property management.
Finally, you may inquire about the rental pricing, as well as the amenities, size, and other details, by calling the numbers provided on “for rent” signs in the neighborhood. However, being able to see inside and exterior images of the home is preferable so you can get a sense of how it compares to the real estate you’re contemplating acquiring.
We propose making a list for each comp so you can quickly assemble all of the pertinent information, such as the DOM, property status, and square footage. If a real estate agent prepares a Comparable Market Analysis (CMA) for you, the comps will already be in a list format that you can compare and contrast.
3. Determine the cost per square foot of comparables
The square footage is one of the criteria taken into account when comparing rental houses. This is the size of the property “under air,” or how much usable space there is on the interior. Once you have the square footage of the comps you found and the rental prices for each, you can simply calculate the price per square foot by averaging the three.
There is no price per square foot rule of thumb since prices vary so much throughout the nation. Renters in San Francisco, for example, pay an average of $4.95 per square foot. This is more than four times what Milwaukee tenants pay.
The price per square foot is determined by the location of the property, as well as the facilities provided by the building and the quality of the unit. A contemporary condo in a building with valet and a pool will cost more per square foot than an original, non-updated unit in a building with self-parking and no pool.
Once you’ve determined the price per square foot of the comps, add them all together to obtain the average price per square foot. For example, if three comparable properties have prices per square foot of $2.50, $3.00, and $2.80, add them together and divide by three to find the average price per square foot ($2.50 + $3.00 + $2.80 = $8.30, therefore $8.30 / 3 = $2.77).
The rental area’s average price per square foot is $2.77. You may multiply this number by the square footage of available homes in the neighborhood to see if they’re viable rental investments. It’s vital to remember that this is the pre-adjusted price per square foot; in the following two phases, you’ll modify it for occupancy rates and amenities.
Example of a Rental Price per Square Foot
Assume you know that a similar home in your area rents for $3,500 per month and is 1,750 square feet. To get the price per square foot, divide $3,500 by 1,750, which is $2.00 per square foot ($3,500 / 1,750 = $2.00 per square foot).
To acquire a pre-adjusted rental rate, multiply this value by the square footage of your home. If your intended rental property is 1,770 square feet, you may get the pre-adjusted rental rate of $3,540 by multiplying 1,770 by $2.00 (1,770 x $2.00 = $3,540). In the next phases, we’ll compare this amount to the rental’s monthly cost to calculate the predicted cash flow.
4. Amenities should be included into the rental price.
Adjusting the average rental price per square foot for amenities is one of the final procedures in an RMA. When assessing a fair market value, an appraiser adjusts for property renovations and features in a similar way. The key distinction is that we’re modifying the three comps and utilizing the amenities to estimate a rental pricing.
Overall, if you picked your comps well, the average price per square foot should be similar to what you can charge for your possible rental property. However, keep in mind that not all places have comparisons easily accessible, and you may need to change those benchmarks depending on the variations in amenities. If a comparable property has a pool but none of the other homes do, you may want to lower the average price per square foot, and vice versa.
There are two categories of amenities in general:
- A community or onsite amenity is one that benefits everyone who lives in the building (such as a parking lot, billiards room, or spa)
- A balcony, washing, and dryer, or updated appliances are examples of apartment amenities that are exclusively for the tenants in the unit.
Although amenities may not always have a direct price link, they do have an influence on the total rental price. They differ significantly not just by city, but also by neighborhood. A doorman, living in a pet-friendly building, and having an onsite fitness facility all enhance the total rent price of a building in New York City.
Outdoor area, valet parking, and an onsite spa may alter the rental pricing in different regions of the nation. Similarly to how certain facilities may raise the rental price, a lack of certain amenities can lower it.
For example, a building with insufficient parking or no security may rent for less than the building next door, which has designated parking places and 24/7 security. However, bear in mind that if you purchase a condo or HOA unit, amenities will almost always raise your dues, thus the rental price must reflect this.
Familiarize Yourself with Occupancy & Vacancy Rates
Vacancy rates are the percentage of a year that a property is unoccupied, while occupancy rates are the percentage of a year that a property is occupied by renters (the percentage of the year these same units are vacant). These are critical so you can avoid areas with a high vacancy rate and alter the rental prices of your comps based on the area’s vacancy rates.
A high vacancy rate is determined by the area’s criteria, however anything above 11 percent is typically considered excessive. The occupancy rate plus the vacancy rate must add up to 100 percent. If the vacancy rate is 10%, you may estimate that the occupancy rate is 90%.
Knowing the vacancy and occupancy rates won’t inform you what rental price to charge; instead, they might serve as warning signals for areas to avoid or signs that an area is renting well and you should consider purchasing there. Furthermore, altering the average rent per square foot may lead you to lower or raise your expectations.
There are three common methods for determining occupancy rates:
- The census website has a section on occupancy rates under housing.
- A local real estate agent, which you may locate by doing an internet search or visiting the office of a local real estate agent.
- A local property management business, which you may find by searching online for a property management company in your region.
If occupancy rates are greater than 11%, you may want to consider lowering the area’s typical rent. In contrast, if the market is hot and vacancy rates are low, you may be able to charge somewhat more than normal.
5. Calculate the Price of a Property for Sale
You’ve learned how much typical rentals in your selected area are, and now you need to learn about the available houses for purchase and how much they cost. This is referred to as the area’s housing inventory or supply. Given the typical rentals you estimated above, you must examine if there are enough properties available at a low enough price range where you can cash flow an investment property.
A community with too much supply might be a warning sign. When there is an excess of goods on the market, this occurs. For example, if ten comparable rentals are available on the same block, tenants will be able to select which one they want, and you may not have enough demand (renters) to match inventory availability. Because of your carrying expenses and lack of rental revenue, your property may languish on the market and you may not be cash flow positive.
Knowing the rental rate per square foot is important because it allows you to look at the available properties and determine whether they are cash flow positive based on your down payment and monthly carrying expenses (which include your mortgage payment, taxes, insurance, etc.).
For instance, if the monthly prices of three available homes for sale are $1,500, $2,000, and $2,500, you’ll need to figure out how much rent you can charge for each to decide which one to buy. If the average rent per square foot in the region is $2.00, you could be able to charge $1,500, $1,900, and $3,000 for each, respectively.
As you can see from this fast study, the most expensive property available, despite costing more, will provide you with a higher cash flow. This not only indicates that the neighborhood is experiencing a strong rental market, but also that this particular property is an excellent investment.
How to Perform a Rental Analysis in a Few Minutes
Let’s pretend you don’t have time to complete a thorough rental market research and instead want to do a short rental analysis. You’ll need to know how much similar homes rent for and what facilities they offer, as well as occupancy rates and carrying expenses.
You may merely write a few notes on the area, amenities, similar rentals, and occupancy rates since you’re short on time. The 1 percent rule is a good starting point. You should charge rent equal to one percent of the rental property’s worth. However, this is a conservative guideline, and we propose a figure of 0.5–0.8% of the value.
For instance, if you paid $500,000 for a rental property, you would charge between $2,500 and $4,000 per month. Read our post How Much Should I Charge for Rent for additional information on determining the rental price for short-term rentals, rooms, and investment properties.
“Study where your rental market is located. Consider the following: How many rental flats are available in my area? What are the current rent costs in my neighborhood? Which kind of rental property would I want to manage? (single-family, studio, multi-family, etc.) When it comes to deciding the rent, being prepared and having a strong understanding of your neighborhood can assist.” — Chris Molinari, Rentometer.com’s Digital Content Coordinator
Example of a Quick Rental Analysis
Assume you’re trying to find out how much a certain apartment should rent for by comparing it to two other units in the neighborhood. For example, if similar property “A” costs $3,000 per month and has a 90% occupancy rate, it is most likely priced correctly because of the high occupancy rate. It’s reasonable to conclude that the apartment next door, property “B,” is expensive if it costs $3,700 per month and only has a 60% occupancy rate.
Unit A earns $32,400 per year in gross rent, whereas unit B earns $28,800 per year in gross rent. We calculated this by multiplying the monthly rent by 12 (since there are 12 months in a year) and then multiplying by the occupancy percentage.
Keep in mind that there are more aspects to examine when performing a rental market study, but for a rapid analysis, similar properties, occupancy rates, and taking amenities into account are the most important. These may be utilized in addition to the 1% rule or if the 1% rule doesn’t apply to your property depending on the rental pricing of the comps.
Most Commonly Asked Questions (FAQs)
What Does the Average Rent in the United States Look Like?
The average monthly rent in the United States is $1,231 dollars. However, there is a significant difference between what this cash would buy you in a large city and what it will buy you in a less expensive place.
The average rent in Los Angeles is $2,220, whereas the average rent in Cleveland is $959.
What Is an Implicit Rental Rate, and What Does It Mean?
Although an implicit rental rate has nothing to do with a rental market study, it is a common question. It is the opportunity cost incurred by a company when it uses its own assets for commercial activities. The implicit rental rate is a popular search term, however it has nothing to do with an RMA.
Conclusion
For real estate investors, a rental market study is a useful tool. It assists customers in determining the fair rental value of their unit by comparing it to other units in the neighborhood and taking into account the building’s and neighborhood’s characteristics. An examination of the rental market is necessary so that you can establish a price that will attract tenants while still covering your carrying expenses.
After you’ve completed an RMA and determined if the property is a solid investment, you’ll need to get an investment property loan to acquire the property. Visio Lending can help with this. They have a simple online application procedure and give prime borrowers affordable rates.
Visit Visio Lending for more information. for more information.
The “vacation rental market analysis” is a study that can be used to determine the current state of the vacation rental market. This will help you make better decisions about where to invest your money.
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