Guess-timating rent where no comps can be found?

Question

Hello BP Members!I am trying to work numbers on a house I had initially bought as a flip but think might make a better rental. It's a 5/2, and though it's in an inner city suburb of Saint Paul, MN I can't seem to find a comparable comp for the size and location. It's in the Gladstone neighborhood of Maplewood if anyone is familiar; within walking distance of the east side of Lake Phalen and close to the golf course. It's a big house (2000sqft finished when we are done) with an attached 2 car attached/1 car detached garage and we just gave the whole house a facelift so I'm thinking it should be on the higher end for rent.Any tips on how to best estimate the rent numbers in this case? I have calls in to a couple local PM companies with no calls back yet. I used rentometer and it came back with $2200 which sounds great but, also, too good to be true. :)Any advice is greatly appreciated.

Matthew Heimann · Answer

I love that area next to lake phalen. I was "driving for dollars" the other day over there on the st. paul side just south of where you are. Anyway here are my thoughts. Its too far from the U or any of the smaller colleges so i would say it would be very hard to get students. Maybe you could get some young professionals that work on the east side of the cities but that may be a stretch. you could find a big family but not sure how long you would need to wait for that to line up but i have seen it. If you could sell it for around 300k, that seems like a good flip to me that would probably be my choice. Another thing to think about is what your long term goals are and which decision better positions you for them. As a flipper/rehabber is this flip looking to be above or below par compared to your other flips?Let us know what direction you decide to go!

Alyssa Strom · Answer

@Hannah Krebs Good situation to be in! Market is great for SF homes under $300k and you would likely rent it quickly at the right price. I do think $2200/month seems high for that area plus tenants will need to factor in utilities so depending on your heating source that could be significant. There is a 4 bedroom, updated SF available for rent on Craigslist right now further east of your place for $1850/month so I'd think that's probably more in line with pricing. Two things I've learned with our 4 bedroom apartment rental: 1)Tenants stay longer but the units are more difficult to rent out when vacant 2) If you are not close to campus (less than a mile) you likely won't get students. We are less than 10 minutes from multiple universities and have never had students apply. So you'll get either families or maybe a group of friends. If you're open to it Section 8 does pay well for 4 bedrooms in Ramsey County.

Steve K. · Answer

@Hannah Krebs Have you checked rentometer? That and I would call some local PM’s and see if they will give you their opinions. Or just list it and see what happens; if you don’t get any interest you’ll have your answer.

Jaysen Medhurst · Answer

@Hannah Krebs, I'm leaning toward flip for several reasons:I'm quite skeptical that you can get $2200/month rent. Why? Because anyone who can afford that can easily afford to buy a $260k house. As your numbers quite clearly show.Student rentals might get your income numbers up, but they will beat the heck out of the property, your neighbors (who I assume are mostly families) will hate you, you've missed lease-up season, and who knows if students are actually going to be back next school year.Your Return on Equity (ROE) isn't going to be great. Maybe 6-7%. The better your ARV, the worse your ROE.As far as your analysis:Vacancy is high for a SFR. I usually figure 5% because they draw families who don't want to move a lot.You left out Management (10%). Always underwrite management, even if you plan to self-manage at first.Your taxes look low. If you've increase the value by 50-70%, you should expect taxes to go up in kind.Insurance definitely looks low and that round number makes me think it's an estimate.Your repairs and maintenance is way too low. I use 15% combined. If you had done a major renovation, I'd say use a lower number, but that's not the case.What is the $30/month "utilities" for? With a SFR they should all be paid by the tenants.My math puts you at $300+/month cash flow. I'm just very worried that your rent assumption is too high and taxes/insurance are to low. You could be breakeven or even negative very easily.

Matt Leber · Answer

@Hannah Krebs I didn’t realize yours is 5 beds. You could probably use the 4 bedroom FMR from HUD as your worst case scenario. Or figure out how much of a jump it is from 3 to 4 beds and apply a similar increase to determine 5. Either way, hope it gives you a reasonable rent range.

Hannah Krebs · Answer

@Matt Leber Thank you so much for the suggestion, I am going to check that out now!

Matt Leber · Answer

@Hannah Krebs check out the housing and urban development (HUD) website for 2020 fair market rents (FMRs) for the zip code the house is in. If the HUD website doesn’t have it down to the zip code level, they will have a listing for the metropolitan area. They will have fair market rents listed for studio though 4 bedroom homes. This can give you an idea.

Hannah Krebs · Answer

@Jaysen Medhurst Great questions to be sure!I did the rental analysis two ways, one refinanced pulling our money out and one leaving it as is. We purchased at a higher interest rate so we could ideally cash out to a lower interest rate and not really impact cash flow. We currently owner occupy the home so we were able to get the lower down payment up front, and could remove PMI if we financed. We purchased the house for 175k and the ARV is somewhere around 260k. The most recent sale of a 4/2 in our neighborhood was 303k but I'm trying to be conservative. We will have 20k into it after siding, windows, and the interior work. All in all a solid flip if the market holds!Here's the analysis:As far as renters, we are 10 minutes from a large university and with parking for 8 vehicles legally we could absolutely rent it by the bedroom to a bunch of college kids. We also live in an area where there are a lot of family groups that tend to rent out one big place for multi-generational living instead of renting multiple separate homes so I think there could be a market. That could definitely be an issue, though, as 5 bedrooms is a TON of space and a 4-bedroom would get most traditional families through.Thank you so much for reviewing the analysis and the food for thought!

Jaysen Medhurst · Answer

A 5/2, huh? That's a unicorn to be sure, @Hannah Krebs. I don't know your market, so take this all with a grain of salt...A few things to think about:Have you done a full rental analysis to make sure this will pencil out as a rental? My gut says it probably isn't a great candidate due to the rent you quoted. What's the ARV? What are all the expenses? If you share your analysis, I'm happy to take a look.A 5/2 property will have a very limited market. Who do you see renting this? Families, couples, a bunch of students living together? Why would they rent your house for $2200 instead of buying?Have you considered Section 8? The BP Podcast had an investor from D.C. on recently who's niche is large, up-scale homes that he rents to Section 8. There's quite a premium for 5-bed properties and since there are so few, he gets to be super picky about his tenants and they tend to stay a long time. It's worth finding that episode and listening to his strategy. I'm sure he's on BP, bet he'd be happy to chat.