Feedback for gauging rental demand and looking at rental comps

[Priscilla Chin]

Hi everyone, 

I'm looking to buy my first long term investment property and am not sure whether I'm approaching my research for rental comps correctly. Please give me feedback!

First, I type in the zipcode to look up the rental statistics on zillow. Example with zipcode 11203:  https://www.zillow.com/rental-manager/market-trends/11203/

Then if the market temperature on this page says warm or hot, I'll look up a house I might want to buy in that zipcode. Example: 3bed 2 baths. And I look up 3 bed 2 bath houses for rent in that same zipcode to see houses similar to the one I chose to get a gauge for how much I can rent it out for. 

Along that process, I will come across a few homes in that zipcode that have been on the market for a while...64 days, 96 days, etc. These houses seem to be in decent condition, clear photos, etc renting at a reasonable price compared to the newer listings. When I see this, it's concerning because.. why are so many decent looking homes in a "warm" market temperature on the market for two plus months??? And that usually steers me away from that zipcode because I have to imagine that my house can possibly be vacant for months as well. 

Is that conclusion correct? Am I missing something? Are there other ways to gauge the rental demand??

[Noah Wright]

Quote from @Priscilla Chin:

Hi everyone, 

I'm looking to buy my first long term investment property and am not sure whether I'm approaching my research for rental comps correctly. Please give me feedback...

Hi Priscilla,

Your approach to researching rental comps and market temperature is solid, but there are a few nuances that can help refine your process and give you a more accurate picture of rental demand. Let’s break it down:

1. Understanding Market Temperature on Zillow:

Zillow’s "warm" or "hot" market indicators are a good starting point, but they reflect overall real estate activity, not just rental demand. The market could be "hot" for home sales, but that doesn't always translate to rental demand. Keep in mind that it’s a broad overview, so combining it with more localized research is key.

2. Investigating Days on Market:

When you see homes sitting on the market for 60+ days, it does raise a red flag, but it doesn’t necessarily mean rental demand is low. Consider other factors:

• Pricing: Is the rental price competitive for the area? Sometimes homes are overpriced relative to the amenities or condition.
• Seasonality: Rental demand fluctuates depending on the time of year. A home sitting for months might be because it was listed during a slower rental season.
• Marketing and Property Management: Some landlords don’t market their properties well, or they might have strict tenant requirements that reduce the pool of potential renters.

3. Deeper Dive into Rental Demand:

Here are a few alternative ways to gauge rental demand:

• Local Property Managers: Reach out to property managers in the area for insights on vacancy rates, tenant demand, and how long it typically takes to rent similar properties.
• Vacancy Rates: Research the average vacancy rates in that zipcode through local real estate reports or rental listing platforms like Zumper or Rentometer.
• Rent Growth Trends: Check whether rents have been rising, stagnating, or falling in that market over the past few years. Consistent rent growth can signal strong demand.
• Job Market & Population Growth: Rental demand often follows job and population growth. If you’re investing in an area with new employers, infrastructure, or young professionals, demand could stay strong even if current listings are stagnant.

4. Competition and Listing Quality:

If homes are staying on the market, it could also be due to stiff competition in that neighborhood. Check whether there’s an overabundance of similar rentals or if newer, more modern buildings are attracting tenants away from older stock.

You're on the right track by doing detailed research, but don’t let longer days on market automatically steer you away from a zipcode. Dig deeper into the cause of those vacancies and look at broader trends like job growth and vacancy rates. If you're unsure, talking to local property managers or even prospective tenants can give you a clearer sense of whether a property will rent quickly.

Best of luck with your first investment!

[Drew Sygit]

@Priscilla Chin decent way to compare markets, but a little short-sighted.

CHALLENGE: No one can accurately predict where a market will be in 12, 36 or 60 months!

Do you really understand the underlying logic of all the market data you are looking at or are you just blindly following it?

What do you think will have more of an impact on your rental investment - eviction laws or current market temp?
- Do you know how long it can take to get rid of a nonpaying tenant in the State of NY?

Regarding your question about rentals being on the market for 64 days, 96 days, etc. - why do you think that is?
- Yes, it MAY be important, but if you don't understand the "why", how do you know you are properly interpretating & using the data?
Also, why would you want to go to a market that is currently hot and perhaps pay top dollar?

_____________________________________________________________________

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

If you buy/renovate a Class A property in Class D area, what quality of tenant will you get?

Similarly, if you put all Class D tenants in a Class A 4-plex, what do you think will happen?

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+ (roughly 5% probability of default), zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680 (around 10% probability of default), some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620 (approaching 22% probability of default), many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

The City of Detroit has 183 Neighborhoods we’ve analyzed.

PM us if you’d like to discuss this logical approach in greater detail!

[Min Zhang]

Hi Priscilla, you can check out Rentometer and the "Price My Rental" feature on Zillow. They provide insights into the market rent based on the number of bedrooms and the address you input, along with some rent comparisons.

There are many factors why a listing might stay on the market for too long, and one of them is pricing. When you list your rental property, it’s important to set the price within the market range. If that number still makes sense for you, listing your rental $100 below market rent can help you rent it out quickly. Hope this helps!

[Nick Harrington]

Hey Priscilla - very exciting! Happy to chime in here. 

Whenever I am comping rentals, I always start with Rentometer. I have a pro membership which is I believe $5 / month and it is well worth it. 

This gives me a gut check in terms of what the rent range is for this property based on location, number of bedrooms, and number of bathrooms by showing the average rent, median rent, 25th percentile, and 75th percentile. From there, based on the condition of the property, I can then determine where on that range I should expect for rent. 

Next - I look to look at Zillow (which you mentioned) to see the active number of rentals on the market that this would be competing with. I wouldn't let 2 rentals that have been sitting for 30+ days deter you. If you are seeing  a large number in a small area that have been sitting, I would be more concerned. 

Next, I would like to uncover what has rent growth / decline looked like in that city / area overall. In general, are they going up or down YoY.

There is no true "science" to it and it is a bit of an art, but to answer your question, you are doing all the right things, and I would not let 2 rentals that have been on for a long time stop you.