How to Estimate Rent for Deal Analysis

[Daren H.]

I would like to know how experienced buy and hold investors are estimating potential rent during deal analysis. I start with recent comps of similar size, type properties in the same neighborhood. What confuses me is how different people recommend using the comps. Some take the average rent of the comps and use this number as the projected rent. Some use the average price per square foot of the rent comps and multiply this by the square footage of the property to be purchased. Some use Section 8 as a guide. These numbers can be very different. What is the best way to estimate rent for buy and hold deal analysis?

[George Kalogeropoulos]

Daren,

Coming up with rent estimates for 'pro-forma' (deal) analysis is both a science and an art. It's a science because plenty of useful data is out there, but it's also an art in that there is a lot of judgment and experience that comes into play. This is true for even the largest, most sophisticated institutional investors.

DATA SOURCES
In addition to those listed on the excellent article that Bryan H. linked to above, there are:

Axiometrics / REIS / Pierce-Eislen: These folks conduct phone surveys on a monthly basis and publish reports and analysis. They are geared towards an institutional audience (e.g. private equity), and focus on large multifamily.

RentMetrics.com: Free rent comps, with features and amenities. Full disclosure: this is my company, so I won't say any more to avoid breaking the 'self-promotion' rule.

MLS: This is mentioned in the article, but depending on where you are located, your local MLS may or may not have good quality rent comps available. When they are listed, they tend to be nicer properties, since an agent is typically involved in the transaction.

SUBJECTIVE FACTORS
There are a number of subjective factors to take into account when comparing your property to a rent comp. They include:

Time: When was the comp rented? The rental market is highly cyclical / seasonal, and a comp from November is not the same as one from May.

Size: As the size of a unit goes up, the rent per square foot typically goes down. Micro-apartments in San Francisco will go for up to $7 / sq ft (!), while a 'normal-sized' 1-br down the street of similar quality will go for $3.50 - $4.50 per square foot. Take this effect into account - don't just multiply the rent per square foot for comps times your unit's size, particularly if those comps are a very different size from your unit.

Location (location, location...): This one is obvious, but did you know that being at an intersection lowers rental value? (We've statistically proven this to be true). Walkscore can be an interesting metric to look at here as well.

Features/Amenities/Age: Also obvious, but tricky to fully take into account because different renters value features/characteristics and amenities differently.

Section 8 (and BMR, and rent control): Section 8 is a completely different market - I would not comp against these units unless your property falls into one of these categories.

I hope that helps, and feel free to let me know if you have any questions.

George