How to Analyze a Market for Long-Term Rentals

Buying rental property is one of the most popular ways to get into real estate investing.

Owning rental homes gives you a passive income stream from rent payments, and they also offer plenty of substantial tax benefits. And with long-term rentals, you avoid the stress of worrying about frequent vacancies, seasonal fluctuations, and other variables that come with short-term rentals. However, there is more to being a smart real estate investor than collecting monthly rent payments.

Investing in rental property for beginners can be challenging. But like any type of real estate investing, the path to success starts by understanding your investment strategy and then conducting a thorough real estate market analysis. A long-term rental market analysis (RMA) involves two things: gathering data and analyzing data. First, identify a market that you would like to research and purchase a rental property in. Second, analyze the market for long-term rentals and gather information on rental prices, vacancies, and demand to ensure the property gives a good return on investment (ROI).

Do you want to know how to make money with rental properties? This article will help determine if a specific market is a good place to invest by covering these topics:

• What is a long-term rental property?
• The benefits of long-term rental properties
• Long-term rental market analysis (RMA)
• BiggerPockets Rental Property Calculators
• How to analyze the long-term rental market
• Warning signs to heed

What is a Long-Term Rental Property?

A long-term rental (LTR) property is where the lease is typically for 12 months or more. In general, tenants in a long-term rental property pay for utilities on top of monthly rent payments.

The difference between a long-term and short-term rental property is the lease term. Typically, short-term rentals are calculated on a daily, weekly, or month-to-month basis.

The Benefits of Long-Term Real Estate Investing

Long-term rentals have many benefits for real estate investor rookies. For example, long-term rental properties offer landlords a steadier source of rental income and fewer expenses. Additionally, it may be relatively easy to arrange real estate financing. And typically, the tenants care for the day-to-day upkeep of the rental property.

However, before becoming a successful landlord, you must know how to buy a rental property that will provide a good return on investment (ROI).

Long-Term Rental Market Analysis (RMA)

An accurate rental market analysis is crucial if you invest in real estate for short-term, mid-term, or long-term rentals. The RMA involves assessing more than comparable properties and neighborhoods. It involves knowing how a local real estate market performs—its economic, employment, social, and ecological health to assess the rental potential of a specific property.

A rental analysis of a local housing market should make relatively accurate rental estimates. For example, is there a demand for rented housing? How much rent can you change? Will rental payments cover your real estate loan, maintenance costs, and property taxes? Will you need to use a property management company?  

Other factors in a comprehensive real estate market analysis include the following:

• Cash-on-cash return: This is a way to calculate the annual pre-tax cash flow relative to the total amount of cash invested. It helps to determine an ROI of a rental property. Learn how to calculate cash-on-cash return.
• Price-to-rent ratio: This is a real estate finance metric to forecast potential demand for a rental property in a local market. Ideally, the rent ratio should be high for a real estate investor.
• Capitalization cap rate (cap rate): This useful metric can help evaluate rental costs of similar properties. The cap rate helps to compare the annual return you could expect from a specific rental property with comparable rental properties.
• Vacancy rates: It is crucial to estimate vacancy rates because they directly impact your monthly income from rent payments. The more desirable the property, the lower the vacancy rate you can expect.

The RMA is similar to a comparative market analysis to identify potentially profitable properties. However, it also takes into account the health of the local rental market. 

BiggerPockets Rental Property Calculators

Using the right tools is crucial when making a rental property investment. And BiggerPockets calculators are a great way to analyze the health of a specific real estate market. When investing in rental properties, you must calculate three critical metrics: the amount of rental income you can expect, the total cost of the investment, and property appreciation. Monthly expenses, such as HOA fees and specific  types of insurance are also factored into the calculator.

How to Calculate Rent Estimates Before Buying a Rental Property

Seasoned rental property investors use a trusted rental property calculator to determine the profitability of a real estate investment property. This useful tool can help you identify suitable properties that meet your investment criteria if you are considering the long-term rental market.

The BiggetPockets rental calculator gives you a projected monthly rental income based on the following metrics:

• Rental demand in the neighborhood
• Property costs
• Loan repayments
• Property value appreciation
• Expected income from rent
• Cost of insurance, utilities, and maintenance

After entering the relevant data, the rental property analysis will show the following information:

• Projected returns, including cash-on-cash return, net operating income (NOI), pro format cap, and purchase cap
• Projected expenses based on the 50% rule

You can use the BiggerPockets calculator to help identify comparable properties in the same neighborhood. Or you could analyze comparable properties in different cities.

BiggerPockets BRRRR Investing Calculator

The BiggerPockets BRRRR investing calculator is a unique and powerful tool for buying an investment property to rehab. This tool ensures you never overpay for a fixer-upper you plan to rent out. Rental ROI calculations are based on the following criteria:

• Property address and annual taxes
• Purchase information, including estimated rehab and repair costs
• Rental information, including projected monthly carrying costs or expenses associated with owning and maintaining a property

The calculator provides detailed information on the profitability of the potential rental investment property.

BiggerPockets Home Loan Calculator

Suppose you use a conventional loan for real estate finance. In that case, a mortgage calculator is invaluable in determining how much you can afford. This tool calculates your monthly loan repayment based on the loan amount, term, interest rate, and other associated costs.

How to Analyze the Long-Term Rental Real Estate Market

A detailed real estate market analysis (RMA) is key to buying a rental property that will make you money. This process is vitally important if you want to assess a potential investment property for long-term rental. At the end of the analysis, you will have a clear picture of the local rental market. This information will help to determine if purchasing a particular property for long-term renting makes financial sense.

1. Choose the best long-term rental market research tools

The first real estate market analysis (RMA) step is identifying the right tools. You should have access to real estate listing websites to help you find comparable property data. Here are a few tools you can use:

• BiggerPockets real estate listing website that also shows foreclosures.
• Work with a local real estate agent to get access to MLS (multiple listing services) to see property for average sale price and rent.
• Use popular property listing websites like Realtor.com and Zillow.
• Check out Zumper listings to see the types of houses for rent and rental pricing.

2. Evaluate the neighborhood

The next stage in a real estate market analysis is to check out the desirability of the neighborhood. Assessing the area will give you a clear indication of rental demand, property appreciation, and potential to attract good tenants.

Here are some factors that affect a neighborhood’s desirability:

• Ratings of local schools
• Walkability score
• Access to amenities, shopping, and local attractions
• Good access to public transport
• Trends in population growth to help predict future demand
• Job market health and potential for future growth
• “Quality of life” rankings

Of course, the health of a neighborhood doesn’t always mean a profitable investment. But it’s an indicator of how easy it will be to attract tenants.

3. Analyze all information about the long-term rental property

When investing in real estate with a buy-and-hold strategy, you need your properties to increase or appreciate in value. Comparing historical home prices with current ones can give you an indication if property values in the neighborhood will increase or decrease.

Property investors use the price-to-rent ratio to evaluate rental demand. To calculate this figure, divide the purchase price by the total annual rent price for a particular home. Generally, a ratio of less than 15 indicates that it’s a potentially profitable investment.

Calculating the median home price is another step in a real estate market analysis. A high median home price could indicate a strong rental market in the area because it is more affordable to rent than buy. However, it can mean purchasing a property will be more expensive.

One of the most important numbers to crunch is your projected cash flow and income from rent. To calculate rental return on investment (ROI), subtract the annual operating costs from rental income. Then divide the figure by the mortgage value. Typically, anything more than 10 percent is excellent. However, five to 10 percent may be acceptable, depending on the rental market. And if you bought a rehab property, the ROI may be lower for the first year.

One final piece to understand is the importance of the 1% rule. This calculation multiplies the purchase price or mortgage amount by 1%. The result is the minimum rental price to charge tenants. Using this method allows you to determine how the property will cash flow. It also lets you compare the rental pricing of similar properties to find profitable properties for the long-term rental market.

Suppose an investor is considering purchasing a rental property for $200,000. According to the 1% rule, the property should rent for at least $2,000 each month ($200,000 x 1%).

4. Analyze rent comps for real estate investing

A robust rental market analysis should analyze comparable properties to find the best investment potential. This can help identify good investments and ensure that your rent price represents fair market value.

To analyze the rental market, choose around five comparable properties. It is vital that the properties are in the same neighborhood, have the same number of bedrooms and bathrooms, and have similar square footage. You also need to compare the rent price per square foot of similar properties. Other considerations when assessing rental comparables include:

• Property condition
• Amenities
• Lot size
• Type of neighborhood, including amenities and school zones
• Days on market (DOM)

5. Calculate the price per square foot

An important step in creating an accurate rental market analysis is calculating the price per square footage for the neighborhood. This step can be tricky because many variables affect the average rent price. The comparable properties should be as close as possible to the property you are considering.

To calculate the average rental price per square foot, divide the square footage of the rental comp by the rental price. Now, do the same for four or five additional comparable properties. Once you are finished, add the total of the average price per square foot together and divide by the number of properties.

This result is the average rental price per square footage for the neighborhood. This figure helps you calculate the rental rates you could achieve in the area.

When analyzing comparable rental units in a particular market, adjusting the rental price per square foot for amenities is necessary. The amenities in a multi-family property can impact the overall rental price. Therefore, a pre-adjusted price can help you calculate a more accurate

Here are some examples of amenities in multi-family and some single-family buildings that can affect a rental market analysis:

• Parking lot with dedicated parking spaces
• Games room
• On-site gym
• Balcony
• Pet-friendly building
• Homeowners association
• Access to pool or spa
• Property upgrades
• Air conditioning
• Hardwood floors

The primary goal of a real estate market analysis is to compare rental properties that are as close as possible in terms of size, location, and amenities.

6. Get data on occupancy and vacancy rates for long-term stays

Knowing vacancy and occupancy rates is crucial when analyzing real estate markets for long-term rentals. They can be a good indicator of potential profit from a long-term rental. However, it’s good to remember that various factors impact the occupancy rate of a particular property, such as property condition, rent price, and location.

Although calculating the occupancy rate is typically used to assess short-term rentals or multi-family buildings, it’s useful for all real estate investors.

For example, a rental property’s high vacancy rate with a competitive rent price in a high-demand area could indicate serious issues with the property. On the other hand, the issue could be with marketing or problems with the listing.

7. Analyze the profitability of buying a property to rent

Once you have as much data as possible from your real estate rental analysis, evaluating the sale prices of available properties is necessary. Real estate investors know that not every property for sale is a good investment in the long-term rental market. And many cheap properties for sale in a neighborhood could be a red flag regarding rental potential.

If you have completed an accurate rental market analysis, it should be straightforward to identify properties with excellent potential. The average rental rate per square foot can help determine positive cash flow potential from an investment property.

For example, the cheapest available properties in a neighborhood may not generate the rent you want if they lack the amenities or are in a poor location. Remember, your bottom line is to generate the strongest return on investment in the long run.

8. Find the best deals

Successful real estate investors must use various methods to find a good investment property. After identifying a local real estate rental market with excellent potential, it is necessary to interpret sales activities on rental comps. Here are some ways rental property investors assess specific market trends:

• Network with local real estate agents. A local real estate agent can provide valuable insights on comparable properties. They can also help you discover new properties for sale that are not yet listed. 
• Check out current sales. Look at pending sales for comparable properties and use the information to calculate the average sale price. Also, gather data on closed sales to assess how the local real estate market is performing. 
• Days on market (DOM). A local real estate agent can give information on the number of days a property is on the market. For example, a property that has not sold in several months could indicate that it is overpriced or has serious structural issues. 
• Price reductions. Try to determine why a listing price was reduced. This information could help negotiate a purchase price or give vital insights into the local real estate market.

Warning Signs Real Estate Investors Heed

It is good to be aware of signs that a specific real estate market is underperforming regarding long-term rentals. For example, buying an investment property in a bad neighborhood could severely impact your cash flow. Additionally, the market value of a good property in the wrong place can decrease over time. 

Here are some red flags that you should look for another market:

• Poor local economy
• High property taxes
• Stagnating population
• High crime rate
• Low price-to-rent ratio
• The local real estate market is a strong seller’s market
• Many properties in the neighborhood have high DOM
• A high number of rentals in a particular neighborhood shows it will be difficult to attract tenants

Of course, neighborhoods change. And purchasing an investment property in an up-and-coming area could be a shrewd investment. But first, you must do your homework to learn about development plans, new employment opportunities, and plans to improve amenities. 

Long-Term Rental Market Analysis — In Conclusion

Analyzing the health of the market for long-term rentals is crucial to becoming a successful rental property investor. It is the best way to ensure you make money on rental properties. Rental market analysis gives you valuable insights to find areas with excellent potential. Additionally, the analysis will help identify the best investment properties in a particular neighborhood.