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?

[Bryan H.]

Read this Determine Rent and search for other articles on here. I

[Jonathan Cubeta]

Daren

When I need to determine market rent, whether it is for a client or myself I use comps and look at price per sqft. The thing with comps is they should really be in the same neighborhood, or at least in the same town. In Ct rents vary from city to city. Also when looking at comps consider things like parking, laundry on site or which floor is the apartment on. If you set your rent and have no luck finding tenants it can always be adjusted down a little.

[Andy Collins]

I love technology, but for this I get in my car, drive around the area and call all "for rent" signs I see,

[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

[Jean Bolger]

A big (unsolicited!) thumbs up for rentmetrics.com, which I just recently discovered. It really is pretty swell. I also check rentometer.com. Craigslist , with the new mapping feature is surprisingly useful You get a lot of ads w/ pictures, so you can tell the shacks from the castles and figure out where your property stands.

[Jose Enage]

Like Jean Bolger, I like rentometer.com a lot and I tend to compare it with rentmetrics.com to come up with my own estimates. For SFRs this is probably good enough but if you are looking at multi-families, there are metric companies you can subscribe to and you can get real accurate. The question is how much do you want to spend.

[George Kalogeropoulos]

Thanks Jean! Any suggestions or feedback are very welcome.

[Daren H.]

"Thank You" to everyone for your feedback. You have given me some additional information to consider.