Keeping a close watch on the local rental market is crucial for any landlord or property manager. Quickly identifying market shifts can enable you to make more timely and accurate adjustments to your own properties and portfolio. One of the most effective tools for doing this is something called a rental comp. Regardless of whether you’re looking to purchase a new rental property or you simply need to analyze your existing book of business, here’s what you need to know.
What are Rental Comps?
In this context, the term ‘comp’ is the abbreviated version of the word comparable. In order to determine the value of a property, it should be compared to other similar properties. This is done as a way to help an investor determine which property would be the best one to purchase. It can also be done to help landlords or property managers determine what the going market price for rent happens to be.
Generally speaking, landlords can typically expect to generate between .8% and 1.1% of a property’s market value. As such, a rental property valued at $250,000 could bring in anywhere from $2,000 to $2,750 per month in rent. That said, additional research is still required in order to determine an appropriate amount of rent. This is where rental comps come into play.
Identifying Comparable Properties
The first step in effectively leveraging a rental comp is to identify properties that would provide an appropriate comparison. To begin, look for properties that are as similar as possible to one another. For instance, choose other nearby properties that have the same number of units, and within those units, feature the same number of bedrooms, bathrooms and indoor square footage. You can (and should) go into as much detail as possible, such as whether the properties feature similar amenities, whether they are pet-friendly, their proximity to things like public transportation, etc.
Any properties you are comparing should also be as close to the same age as possible – typically within a window of no more than 5 years. In most cases, amassing a list of four or five similar properties is sufficient for running a rental comp. If you’re struggling to find this many properties that match your list of criteria, you can increase the number of homes that are as similar as possible to achieve a more accurate average.
Using Rental Comps to Your Advantage
Once you’ve compiled your list of similar properties, you can then use that information to either help you determine a fair rental rate, or decide whether a property is worth purchasing. In either case, it’s important that your comparison is based on the area’s average performance. This will help you identify which properties may be outperforming the others in terms of average rental income.
If you are purchasing, this will help you choose the best investment. If you already own, determining why a particular property is fetching a higher rent can help you either modify or market your property more effectively.
One important thing to note is that rental comps, while valuable, should not be the sole factor in determining which property to purchase or how much to charge for rent. Rather, it should be treated as just one piece of the puzzle that will save you time and help you figure out which properties to analyze further.