One of the biggest challenges to owning a rental property is setting the right rent. Set the right too high and the property can sit vacant for days on end, generating no rental income while there are still bills to pay. A property with a low rent may attract undesirable tenants that end up costing more in the long run.
By running good rental comps, real estate investors can help keep cash flow strong while attracting the best, most qualified tenants. In this article, we’ll look at how rent comps work, online resources for rental comparables, and explain how to run rent comps on your own.
What are Rental Comps?
Rental comps are used to compare the rent from properties with similar features in the same area or neighborhood to each other. Rental comparables are similar to running sales comps. But instead of forecasting what the price of a property should be, rental comps are used to predict what the ideal rent should be and how much cash flow the investment will generate.
While no home is exactly the same as another, rental comps are a tool real estate investors use to determine the level of rent the property should realistically generate, everything else being equal.
Adjustments are made to the comparable rentals to factor in differences such as one property having brand new appliances while another does not, or having a 2-car garage instead of a carport. Tenants generally view an updated rental property with more amenities as offering more value, so they may be willing to pay a higher monthly rent.
Investors buy rental property for the cash flow generated by the rental income.
If a property has an asking rent above what the rental comps show, the vacancy level will be higher and the cash flow lower. On the other hand, if the rent is set too low, a rental property investor may be leaving money on the table and end up with a rental home that is worth less than it really is, due to lower cash flow.
Benefits of Running Rental Comps
Investors buy rental property for different reasons.
A buy-and-hold investor may be building a passive income portfolio of solid, cash-flowing rental property so he can retire early. People with a shorter-term investment horizon, such as investors who fix-and-flip property or wholesale homes, hope to earn a fast profit by buying and selling quickly.
Both of these examples are viable real estate investing strategies, depending on your objectives and the amount of risk you’re willing to take. What they have in common is that knowing what the right rent is can make a property more profitable.
Knowing if a Property Will Cash Flow
Knowing if a property will be cash flow positive is the first benefit of running rent comps.
Real estate investors use a P&L (profit & loss) statement to track income, expenses, and pre-tax cash flow remaining at the end of each month. The costs of owning a rental property are generally easy to predict regardless of what the rental income is.
Normal operating costs include maintenance and repairs, property management fees, and contributions to a CapEx account, and property taxes and insurance. In addition, you’ll need to add the cost of the mortgage (principal and interest).
Assuming that all of these expenses on the bottom half of the P&L add up to $2,000 per month, you’ll need to find a home that rents for more than $2,000 per month in order to turn a profit, and include potential cash flow lost to vacancy in between tenant turns.
Rental property investors use the 2% rule to predict what a home should rent for. If the property price is $150,000 the monthly rent should be at least $3,000. On paper, the property might look like a good investment, especially if your expenses are $2,000 per month.
But what if the 2% rule is off, and after you run the rent comps you discover the property will only generate $2,200 in rent each month? Running rent comps helps separate fact from fiction, and helps you avoid buying a rental property that might not cash flow.
Forecasting Tenant Demand
Running rental comps will also help you to analyze the demand from tenants for rental property like yours. Comparables will also show you how long similar properties with the same asking rent are staying on the market before being rented to good, qualified tenants.
If the rent comps for your property are in the “sweet spot” that tenants are looking for, it’s likely that it won’t take long to get the home rented. By having fewer listing days on the market, the cash flow from rental income will be greater and the property will generate a higher yield.
Even better, you may find that the rent comparables show you can increase the rent due to a strong tenant demand for the type of property you own. In a situation like these, running rent comps is like finding free money.
If you can increase your monthly rent by $100, for example, your operating expenses haven’t increased at all. That extra $100 per month in rental income drops straight to the bottom line, giving you more free cash flow.
The extra incremental cash flow also increases your property value. If single-family rental properties like yours are trading for a cap rate of 6%, the extra $100 in monthly rental income adds $20,000 to your property value: NOI / Cap rate = Market value, or $1,200 per year in extra rental income / 6% = $20,000.
On the other hand, our rental comps might indicate your rent is too high compared to similar properties. Unless the rental market is extremely landlord-friendly, tenant demand will be low, which means you’ll need to reduce your rent to attract better tenants.
Where to Find Rental Comps
Rental comps can be surprisingly easy to find when you know where to look. Some of the best online resources for finding rent comparables include:
Cozy: A Rent Estimate from Cozy takes just minutes to run and costs only $19.99. The report looks like this and recommends a rent estimate based on comparables, along with a confidence score for the rent estimate: Visit the Cozy website
HomeUnion RENTestimate: This rent estimate tool helps you determine the rental value of almost every residential property in the U.S. The rent comps you receive are powered by big data on more than 113 million homes: Run a HomeUnion RENTestimate
MLS: Ask your local real estate agent to run rent comps for you off of the local MLS. The database includes homes there are currently on the market, ones that have been rented, and rentals that went off of the market unrented.
Keep in mind that because there are so many good rental listing websites today, a lot of rentals aren’t listed on the MLS, which means the data may not be the most accurate.
Rentometer: Charging too much or too little for rent has a significant impact on the value of a rental property investment. Rentometer is an easy way to compare rent with other nearby properties simply by entering the property address, asking rent, and number of bed and baths: Use Rentometer for free
Stessa Rent Estimate: This premium feature from Stessa recommends a specific asking rent for your property based on current listings, recent rent comps, market trends, and neighborhood demographics: Learn more about Stessa’s Rent Estimate
Zillow: Rent Zestimate is part of the Zillow Rental Manager that helps you set the right rent based on millions of data points plus local market trends. Rent comps from Zillow take into account your home’s square footage and amenities, updates, and the market rental rates of comparable rental in the area: Visit Zillow Rental Manager
How to Perform Your Own Rental Comps
Even with all of the great resources for finding rent comparables online, it’s always a good idea to do a “reality check” by performing your own rental comps:
Step #1: Investigate the neighborhood
Look for factors that make the neighborhood attractive to renters, such as access to transportation, shopping and entertainment, parks and recreation, and neighborhood and school rankings.
Step #2: Analyze rental comparables
Run rental comps from various sources to learn how other properties on the market compare to yours, based on key features including square footage, number of bedrooms and bathrooms, extra amenities such as a pool or washer/dryer, and whether or not the rental is pet-friendly.
Step #3: Research market trends
Research the historical market trends in the area, including whether asking rents are going up or down, percentage of renter-occupied households, median age in the community (because younger people are mainly renters), and median household and per capita incomes.
Step #4: Adjust for amenities
Amenities – or the lack of – are items that make a rental property more valuable to a tenant, such as updated appliances, on-street parking, and a greenbelt area. In most cases, a home with more amenities will rent for more per month than one with fewer amenities.
Step #5: Look at future demand
Leading indicators that the future demand for rental property in the market may be strong include data points such as population and job growth, rising income levels, and the unemployment rate. Be sure to also look at detailed data including days on market, ratio between asking rent and actual rent, and average occupancy length of rental property in the market.
Tips on Creating Rental Property Comparables
Creating rental property comparables is a mixture of art and science, even for the most experienced real estate investor. Factoring intangibles like these can make the difference between good rent comps and amazing rental comparables:
- Location is key, so the closer comparable properties are to yours the more accurate the comps will be.
- More data is better, with the best rent comps having at least 5 comparable properties with data coming from multiple rental comparable reports.
- Property intangibles such as curb appeal, nice landscaping, utilities included, and nearby neighbors also influence how much a property will rent for.
- Neighborhood amenities including proximity to dining and entertainment, good schools, and parks can be more convenient for today’s renter and offer the lifestyle the best tenants are looking for.
- If you use a property management company, consult them. They likely manage other rentals near your property and can give you a good idea of what fair market rent rates look like.
