It’s understandable if you have questions about rent analysis—what it is, how it’s done, or why it matters—so we’ll explore this topic here.
Table of Contents
- What Is Rent Analysis?
- Why Is Rent Analysis Important?
- Who Would Find Rent Analysis Useful?
- How to Do Rent Analysis
- Using Mashvisor for Rent Analysis
- Best Cities to Invest in Rental Property (2022)
- Bottom Line
Figuring out the best rates for the monthly rent can be difficult even for the experienced investor. Setting the right price isn’t solely about how much you want to charge for rent. It is also about what the current situation in the real estate market is and how much your property is genuinely worth.
Beginner investors can face a real challenge trying to determine the perfect rental rates for each house or condo they own. Every property is different, and so is its value, making the process so much more demanding.
That’s why something called rent analysis can help you immensely.
To learn more about what rent analysis is, who can use it and why—and how to do rent analysis on your own—continue reading.
What Is Rent Analysis?
Rent analysis is a type of analysis that gives investors better insight into the current situation of the rental property market. It provides information on how your property—or your portfolio as a whole—is performing and what kind of rent you can expect to get from tenants. It’s about removing the guesswork out of the pricing equation.
In essence, rent analysis provides you with insight into the rental potential of your property—or the area you have your eye on. It’s the kind of research you want to do if you are looking to buy a long-term rental property or a vacation rental.
When conducting a rent market analysis, it is imperative to consider all your monthly and annual expenses to determine the lowest you can go with the rent price. You can expect a positive cash flow every month if you conduct the analysis well.
To genuinely see the potential of a particular area or a neighborhood, you will want to analyze at least three similar properties before you settle on a property you want to buy. Then, do the math and determine the average rent of the chosen properties—and you will get a reasonable estimate of what you can charge for your apartment or single-family home.
Why Is Rent Analysis Important?
Rent analysis is a crucial step in picking out a property that you simply mustn’t—and can’t afford to—skip. It allows you to use your rental property to its full potential when it comes to the return on investment. In other words, it gives the investors an accurate estimate of reasonable rates they can charge renters based on comparing the specific property to other properties in that neighborhood.
So, in that sense, the most important reason for doing rent analysis is determining the fair price you can charge that covers the costs—but still attracts renters to your property. It’s crucial to remember that the price you set here determines whether your property will be a success in your portfolio. If you underprice your apartment or single-family home, you can miss out on significant profits.
That’s not all; underpricing might lead to something even worse—the price could be too low to cover the costs of the property, such as mortgage payments, annual taxes, insurance, regular maintenance, and, in some cases, HOA fees. It means that the money would be going out of your pocket—which is the definition of a poorly performing investment.
On the other hand, rent analysis allows you to see how high you can go with the rent prices. If your rent is set too high, you will not be able to find renters for your property—leaving you to cover the costs of utilities on top of everything else.
And that doesn’t sound that great for you, either.
Who Would Find Rent Analysis Useful?
Conducting rent analysis can take plenty of your precious time, as it requires plenty of research. However, it doesn’t mean you shouldn’t do it. In fact, every investor with a rental property in their portfolio can benefit from rent analysis.
People renting out their primary residence or dabbling in room-renting won’t find much use in a rent analysis. However, investors can find a rent analysis report helpful if they’re trying to figure out whether a particular property can generate the desired return on investment.
Fix-and-flip investors don’t necessarily need to perform rent market analysis, either, since they generate their return on investment according to the work they put into “fixing” the said property.
It’s important to note that a market rent analysis can be used for all properties—from tiny homes to condos and apartment complexes. However, for investors who want to use their rental property for Airbnb, it might be better to stick to a more specialized rent analysis tool, such as the Airbnb Estimator.
How to Do Rent Analysis
Before we start, it’s crucial to say that there are generally five steps involved in an accurate rent analysis. Once you’re done, you should be able to estimate fair rent prices for a certain property compared to similar properties in the area and the expected maintenance costs.
Rent analysis should tell you whether you can expect decent profits from it or if you should skip purchasing that property altogether—especially if you are trying out the BRRRR strategy.
1. Doing a Neighborhood Evaluation
Evaluating the neighborhood is the first thing you should tackle, as you will need to assess the area correctly. You want to make sure that the place is good and according to your liking, right?
Of course, it’d be best if the neighborhood offers specific amenities that attract renters and is full of respectful renters who pay their dues on time. Some things to look for include:
- A high walk score
- Good schools for the children
- Plenty of parks, attractions, fun, and cultural events
- Lots of restaurants, supermarkets, and malls
- Access to either reliable public transportation or lots of parking spots
When ensuring the area or neighborhood is good, avoid ones with lots of distressed property on a single street, plenty of closed businesses—or generally undeveloped areas with deteriorating pavement or sidewalks. Another thing to pay attention to is the noise level, which could deter many—if not all—renters.
When trying to find the ideal neighborhood, here’s some advice:
Look for one where you, as an investor, feel comfortable. It’s vital that the area looks decent and generally safe—and with all the necessary amenities the person living there may need.
2. Finding the Comparables
Once you’ve determined that the area is suitable for your investment, it’s time to look into the comparables, or, in other words, properties similar to the one you have your eye on. Real estate comparables are what allow you, as an investor, to get a reasonable rent price estimate.
It’s essential to note that only particular properties can be comparable; they must be located in the same area or neighborhood. They also need to share similarities, such as:
- Number of bathrooms
- Number of bedrooms
- Size of the house/apartment in square feet
- Scope of the entire lot
- The general condition of the property
- Days on market
3. Estimating Rent
We estimate the average rent price according to square feet when estimating rent. As such, square footage is one of the principal factors to consider when determining the average rent price based on comparables.
Square footage of property does determine its price but so do the nearby amenities and the property’s condition—whether it’s new, updated, or distressed. For example, a property with a jacuzzi and sauna can’t be rented for the same price as one without the said amenities.
It’s essential to note such things and calculate the cost of comparables per square foot to get the most precise idea of the potential rent rates.
4. Correcting the Rent Prices
Once you’ve determined the average rent price of comparables, it’s time to correct the cost of your property per square foot. So, if you’ve chosen your comparables well, the price per square foot should be your estimated price for the rental property. However, your rent prices still need to be adjusted according to occupancy rates and amenities.
Here’s the tricky part:
Amenities reflect how convenient the property is, but it is often difficult to put into an exact dollar amount. They vastly depend on the area of the city, but the general ones have good schools nearby, a washer and dryer room in the building, and good security. The lack of basic amenities—especially ones related to security—can decrease the rent price significantly in almost all cities in the US.
Occupancy rates are shown in percentages, reflecting the property occupancy during the year. Any occupancy rate under, for example, 90% is considered low, as it reflects that the property is vacant for over six weeks annually.
Why does it matter here:?
It’s a warning sign for investors, as it essentially shows that you can lose plenty of money while your property is vacant. If you’re still interested in buying a property with lower occupancy rates, you should lower the prices to attract long-term renters.
5. Calculating the Property Costs
Once you’ve established the potential rent and found a decent neighborhood, you will need to calculate the costs of your property. During the calculation of the costs, you will need to take into account the rental price per square foot, as well. It enables the investors to see what properties can generate profits and good cash on cash returns.
It should go without saying that it’s essential to invest in a city with an attractive renters’ market. Ultimately, find a property that generates a positive return each month—even if the property costs are higher than other properties you have your eye on currently.
Using Mashvisor for Rent Analysis
Mashvisor’s platform can be of immense help to investors looking to do rental market analysis for a specific investment property.
Granted, many investors will settle for any rent analysis website that does the job—but a rental property calculator can do a lot more for you. It’s an online tool for investors that allows the user to see whether they should invest in a certain property or not. It requires the investor to put in some basic numbers and info about the property before it does its magic.
In minutes, the tool can provide you with valuable information about the property and whether it’s time to purchase it or not!
Mashvisor’s Rental Property Calculator helps users determine whether they should invest in a certain property or not using several real estate metrics.
Best Cities to Invest in Rental Property (2022)
It can be taxing to find a new rental property to acquire as a beginner; researching the market’s latest trends is time-consuming work. That’s why we’ve researched this topic to find the best place to buy rental property.
You will find the best places to invest in rental property—according to Mashvisor’s data—below:
1. Delray Beach, FL
- Number of Listings for Sale: 236
- Median Property Price: $650,318
- Average Price per Square Foot: $349
- Number of Traditional Listings: 978
- Monthly Traditional Rental Income: $2,670
- Traditional Cash on Cash Return: 3.52%
- Traditional Cap Rate: 3.65%
- Price to Rent Ratio: 20
- Walk Score: 87
2. Dothan, AL
- Number of Listings for Sale: 101
- Median Property Price: $300,934
- Average Price per Square Foot: $130
- Number of Traditional Listings: 177
- Monthly Traditional Rental Income: $1,282
- Traditional Cash on Cash Return: 3.27%
- Traditional Cap Rate: 3.39%
- Price to Rent Ratio: 20
- Walk Score: 35
3. La Quinta, CA
- Number of Listings for Sale: 148
- Median Property Price: $1,070,431
- Average Price per Square Foot: $422
- Number of Traditional Listings: 255
- Monthly Traditional Rental Income: $4,390
- Traditional Cash on Cash Return: 3.17%
- Traditional Cap Rate: 3.21%
- Price to Rent Ratio: 20
- Walk Score: 22
4. Wilmington, DE
- Number of Listings for Sale: 173
- Median Property Price: $425,625
- Average Price per Square Foot: $206
- Number of Traditional Listings: 197
- Monthly Traditional Rental Income: $1,738
- Traditional Cash on Cash Return: 3.10%
- Traditional Cap Rate: 3.20%
- Price to Rent Ratio: 20
- Walk Score: 80
5. Aiken, SC
- Number of Listings for Sale: 279
- Median Property Price: $367,034
- Average Price per Square Foot: $177
- Number of Traditional Listings: 264
- Monthly Traditional Rental Income: $1,457
- Traditional Cash on Cash Return: 3.10%
- Traditional Cap Rate: 3.20%
- Price to Rent Ratio: 21
- Walk Score: 72
Bottom Line
Rent analysis is one of the essential steps for all investors—beginners and experts alike. Such analysis helps the investors get a better idea of the ideal rent price by simply calculating the rent of similar properties in the same neighborhood or general area.
The point?
You want to charge enough to cover your costs and still realize decent profits. You also want to attract renters with a relatively fair price—considering the amenities of the said property and the area where it’s located, of course.
And rent analysis is what helps you find that balance.
Mashvisor can help investors determine the fair price—and do so much more. Investors can use the tools to calculate the potential cash flow, cash on cash return, and cap rate.
For a free rent analysis, start using Mashvisor here.