Determining your investment property’s optimal rental value is one of the most valuable skills when it comes to being a successful real estate investor. Even if your rentals are managed by a property manager, knowing market rents will help you determine if you’re making an appropriate return on your investment or at risk of having too high of a vacancy rate.
Why is finding the right rental rate super important?
What’s the big deal if you rent your property below the market rate? Well, if your rent is too low, you’ll miss out on potential income. Owning a rental is your own miniature business, and you should operate it with the intention of making as much money as you can (while being a responsible landlord). Also, if your rent is too low you might end up receiving too many applications that you’ll have to go through to find the right tenant. Work smart, not hard!
On the other hand, if your rent is too high, you’ll probably experience higher vacancy rates as you wait for the right applicant to come around. Of those few applications that you do receive, they will likely include the so-called “desperate” or “professional” tenants, i.e., tenants that will do almost anything to get a rental because they have been screened out of other housing opportunities due to low income, prior evictions, or bad credit.
For every property that we analyze rents for, here are our key considerations:
- Maximizing ROI
- Keeping vacancy to less than 3 weeks
- Finding the best tenant possible
Assuming that you are just curious about running the numbers yourself while analyzing deals, here are some helpful ways to determine market rents for your property to find the best tenant at the most reasonable rental rate.
Property Specifics
How are you going to rent your property out without knowing whatcha’ got? The first step is to itemize all of the specifics about your property so that you know what to compare to other properties. These features will include bedrooms, the number of full and half bathrooms, square footage, fenced backyards, extra storage, garage space, and anything else that might be important to your tenant.
Know your Neighborhood
Real estate is local, and having a good grasp of the general location where you are researching rents is key. I’ve been to many cities where the quality, type, and condition of properties varies dramatically from block-to-block.
The first thing to do when researching rents is to do a drive-by of the area, or at a minimum, check out Google Streetview to get a flavor of the neighborhood. Knowing the neighborhood generally isn’t enough. You’re going to want to know what the neighbors are up to as well! You may find a property in a nice neighborhood where some neighbors stockpile vehicles in their yard or conduct other types of businesses that are somewhat undesirable for the location. These kinds of things will have a large impact on what a tenant thinks of a property and also what kind of tenant the property will attract. Once you have an understanding of your neighborhood you can grade it on a scale of A to D, with A-grade neighborhoodsbeing the best and D-grade neighborhoods being in the worst area of your city. And to be clear, there is nothing wrong with investing in a D-grade neighborhood, so long as you make the numbers work.
Property Condition
After you’ve evaluated the neighborhood generally and the street specifically, you’re going to want to take a look at the condition of your property as compared to neighboring rentals. Things that you’ll want to consider are kitchen and bathroom updates, fenced backyards, floorplans, flooring, paint schemes, parking availability, and storage. From there, you can conduct a comparative market analysis to determine where your property stands in relation to the other nearby rentals.
Everyone can have different opinions when it comes to finishes and property condition, but a good rule of thumb is that you need your property to at least be clean and on-par with surrounding properties. You’ll want to avoid investing in a property that has been over-improved. If you have an over-improved property in a lower-grade neighborhood, you may find yourself in a position of attracting lower-grade tenants who may not appreciate the investment you’ve made into improving the property. Additionally, why you may think that your over-improved property is worth higher rents, it may be hard to achieve higher rents if the surrounding neighborhood does not support similar rents. Finding a happy middleground is key.
Just as we did for evaluating the property, you’ll want to grade your rental property’s condition on an A to D scale and compare the two grades. For example, if you have a B neighborhood and a D property, you’ll know that your rents are going to be lower than surrounding properties without making improvements. Alternatively, if you have a D neighborhood but an A property, you’ll know that you’ve likely over-improved the property for the area and likely cannot command as much rent from your tenants.
Determining Rents
Now that you know everything about the condition of the property you’re researching, the neighborhood, and the nearby rental comparables, we can start to research what your market rent should be. The number one source of rental comparables is going to be your property manager or local real estate agent. Their local MLS will have the best data on historical rents for a given neighborhood. However, you should take care to be very specific with a property manager or real estate agent when asking for help. They don’t know everything you do about the property you’re analyzing, so be as detailed as possible when providing information asking for types of comparables that you need.
If you are planning on self-managing and don’t have access to the MLS, then there are a lot of free sources for rental data out there. You can search Zillow.com, Realtor.com, FaceBook Marketplace, Craigslist, and Rent-O-Meter (pro tip, Rent-O-Meter has an app you can download for cheaper access to rental data). The data is out there, you just need to know where to look!
Now that you have all of the subjective and objective information about the market and the surrounding rents, you can compare the comparables for the neighborhood to your property and assess what the best rent would be. Using the scaling rubric that we mentioned before we can identify a target rent range and adjust for property-specific features that may add or subtract from the rental rate. Don’t forget the key objectives that we’re balancing:
- Maximizing ROI
- Keeping vacancy to less than 3 weeks
- Finding the best tenant possible
Get to Work!
That’s it! Analyzing rents isn’t rocket science, but it does take a little work to arrive at the most optimized rental numbers. Don’t forget, the best rent isn’t necessarily the highest rent, but the rent that optimizes ROI, vacancy, and the quality of the tenant. Don’t forget–not every deal has to be a homerun, we’re just trying to get on base.
Let’s kick the 9-5!
Decide. Commit. Take action.
