Rental comps play an important part in real estate investing. What are they and where can you find them? How do you use them in real estate?
In this blog, we will take a closer look at them and see how they can help you in your real estate investing journey.
Table of Contents
- What Are Rental Comps?
- How Do Rental Comps Work?
- What to Consider for Rental Comps
- Are Rental Comps Enough to Make Investment Decisions?
- Where to Find Rental Comps
- How to Value Investment Property in 3 Steps
Investing in properties to rent out can be lucrative as long as you choose your location strategically, buy the right income property, and set accurate rent prices. However, it’s challenging for some real estate investors to determine whether an investment property will be profitable or not.
Thankfully, investors can use real estate comps to help them decide whether or not a certain property will make a good investment.
The term “comps” is used in real estate investing and refers to listings of comparable properties for rent that will help you determine the value of an investment property.
When investing in real estate, wise real estate investors will not only look at and analyze any property that they believe to be a profitable investment. Instead, they will look at a number of investment properties that are similar to one another. They then compare them in order to know the rental market performance in an area.
Analyzing comparable properties allows investors to identify apartments that show a higher-than-average performance, for example. It is the reason why it’s essential to know how to find and use them to be successful in real estate investing.
What Are Rental Comps?
Rental comparables are used to compare similar properties in a select neighborhood to draw conclusions about a particular market’s performance where long term and short term rental properties are concerned.
When comparing properties in a particular location that will be rented out, your comparables should only include properties or apartments that are similar in size, number of rooms, and other features.
So, when looking for comparable properties, you can choose houses and apartments based on their zip code. By using postal codes as a reference, you can more easily group up properties in a specific area, such as a neighborhood or street.
Unlike other types of real estate analysis techniques, rental comps focus on the current performance of a very specific market. Other types of analysis try to predict the future performance of a property or a market.
Long Term Rental Comps
In the world of real estate, there are two main types of rental properties. It means you will need to adjust your methodology and property selection based on the type of strategy you want to use.
The long term strategy is the most common type of strategy that investors and landlords use. Under this strategy, landlords lease their properties to tenants for a minimum of six months. Typically, contracts are for a full year.
Since it is the most common investment strategy, investors use it as their baseline for comparing properties that typically focus on monthly or yearly rental income, unlike vacation homes.
Short Term Rental Comps
Short term rentals increased in popularity in recent years thanks to platforms like Airbnb. Nowadays, real estate investors are as likely to invest in a vacation home as they would in a long term rental.
Vacation houses, like Airbnb properties, may be riskier investments, but they can give you higher earnings. The thing is, it also means that using comparables for Airbnb properties can be more challenging for several reasons.
Firstly, Airbnb properties see a higher tenant turnover rate, so their future performances are harder to predict.
Additionally, Airbnb properties don’t come with fixed nightly rates, and hosts often need to adjust their rates depending on seasonality and demand.
Finally, when you’re looking for data about vacation houses and apartments, short term rental data is quite limited on the multiple listings services that are private databases.
Luckily, there are lots of tools and online platforms that can help you, such as Mashvisor and Zillow, which we will discuss later.
How Do Rental Comps Work?
Once you know how to find similar properties to use for comparative analysis, you also need to know how they work for you as an investor. Rental comps are an essential real estate investing tool that compares the income from rent with similar properties in the same neighborhood. Typically, they are presented in an Excel sheet or a table format to allow for easy comparison and sorting.
Analyzing an income property and knowing how to run rental comps can help investors determine the ideal rent prices in a particular location. More importantly, it can also provide a general overview of how much cash flow and income an investment property can realistically generate.
When comparing properties, you should notice that they should share close similarities with one another in certain aspects.
For instance, you own a two-story, three-bedroom, two-bathroom house. You want to find out how much to charge your tenants. You should compare it with other two-story properties with the same features.
Similar or Comparable Properties: What Does It Mean?
In general, to use rental comps as a tool, you need to compare properties in the same neighborhood with closely similar features. It’s all about knowing how to find the right properties to use as your comparables.
It means that you are to consider the property type, the size, the number of bathrooms, and the number of bedrooms, among other things.
Usually, comps will not limit the comparable properties to those with the same number of rooms or size as the subject property. In such cases, you need to make adjustments to factor in the differences in comparable houses. The properties can differ in the number of bathrooms, the age of the appliances and furniture, or the size of a garage or carport.
What to Consider for Rental Comps
The main purpose of using comps is to compare similar houses for rent so you’ll get an idea of how much income an investment property can most likely generate. But what exactly are you comparing?
Depending on the investment strategy that you’re using, you will want to compare the metrics that are most important to your investment.
If you’re looking to invest in a rental property, the metrics that are most relevant to you will be the monthly income, the listing price, and the occupancy rate.
Also, depending on your rental strategy, you might want to use comparable properties that show the nightly rate for short term or vacation homes or the monthly rate for long term or traditional rentals.
So, the properties that you will need for comparison should include the above details, as well as the necessary property details, including the number of rooms, size, distance, and other available facilities.
Essential Property Details When Comparing Similar Listings
Learning how to find the right comparable properties is all about having an eye for detail. The best comparable properties should share very close similarities to your subject property. It is why it’s important to know what details you need and how to look for them. It will allow you to make an accurate comparison that can help you with your investment decision.
Here are the essential property details that you need to include in rental comps:
Location
Make sure to include the specific location—an exact neighborhood, street, or village. Some investors just go online to search or look up “rental comps near me.” However, indicating the precise location of your subject property will generate more accurate results.
As I mentioned earlier, using zip codes can help you limit your search to specific neighborhoods or streets, and private databases will typically include such information.
However, zip codes might not always be available, such as if you’re comparing off-market properties that aren’t on the MLS. In this case, you can use street names and specific addresses to pinpoint properties and group them up based on their location.
Property Market Value
Property market value refers to the value of the property when sold—it allows you to check whether the income property is reasonably priced or not. Also, it enables you to calculate your potential cash on cash return and cap rate.
Keep in mind that you will need an updated and current market value for the houses or apartments that you want to compare.
The data on most private databases is typically up-to-date, but other data sources, such as Zillow, might not be completely accurate. Also, platforms like Airbnb don’t include such information about vacation homes listed on them.
Rent Prices
The rent prices or rates of the property are the key stats that you want to keep track of as a rental property owner. You can monitor them through monthly or yearly rental income or the daily rate if you’re comparing vacation houses.
Find out how much your property could earn as a vacation rental by using our free Airbnb calculator.
Additionally, investors typically use the rent per square foot metric to compensate for any differences in the sizes of houses and apartments you’re comparing.
Property Size
Comparing properties of similar size, or at least with sizes that are close to your subject property, can give you a more accurate analysis.
In some cases, you also take into account the size of the lot, as the space around the house can add to the property’s potential income.
Smart investors will often use areas such as front yards and backyards to build utilities or even expand the property to accommodate more people.
As mentioned above, using the rent per square foot metric combines both the income and property size in your comps.
Property Type
When looking at comparable properties, you also need to consider the property type. If your subject property is a single-family home, you should not compare it with an apartment or a multifamily home.
Number of Bedrooms
As mentioned, the number of bedrooms is one of the most essential metrics used when comparing similar listings. Consider comps with the same number of bedrooms as your subject property.
Number of Bathrooms
While it is not the main priority in making a comparison, you may also consider the number of bathrooms.
Parking
Also consider the type of parking spaces, whether a property comes with a garage, carport, or on-street parking. Being able to access street or private parking areas can significantly improve the value of a property, so keep it in mind when working with comparables.
Depending on your goal, you can offer free or paid parking to either increase the demand or income of the property.
Amenities
Rental comps may also include other features offered by other landlords and hosts. They include appliances (and how new or old they are), pet-friendliness, landscaping, and upgrades or improvements. A play area and a swimming pool can be considered amenities, too.
If you’re doing comps for a vacation house, you’ll want to consider the effect of the amenities on the seasonality of the property. For example, if you’re comparing properties with a swimming pool, such an amenity will only increase the value of your property during the summer season.
Also, amenities and unique features are great for marketing and advertising your property on Airbnb and other similar platforms. They often add appeal to a property.
Condition of Property
As an investor, you should also factor in the general condition of the property, especially its construction date, when comparing similar listings. It is especially crucial if you’re trying to find foreclosed or distressed properties that you want to renovate.
In such a case, you must be able to assess the reparation or renovation costs as they will make up a good portion of the overall purchase price.
Since the MLS doesn’t include off-market distressed properties for sale, if you’re looking for information on foreclosures in a specific neighborhood, Mashvisor is a great website to do so.
Are Rental Comps Enough to Make Investment Decisions?
After obtaining your list of rental comps, you will want to compare the investment properties based on the location’s average performance. It will help you identify income properties with above-average stats.
For example, you’re looking at comps and you see three properties that are similar in most aspects. However, one of the properties shows a higher-than-average income but is listed at nearly average market rates.
The said property will most likely be the better choice. However, it isn’t always the case, as there are certain factors to consider.
While comps can give you an excellent starting point when searching for an investment property to purchase, they are by no means sufficient to base your entire investment decisions on.
The reason behind it is, sometimes, a property might look great on paper because its listing price and rent rate are average or above average.
However, upon further inspection, you might discover that the listing price of the said property is low because it is in a poor condition. Also, the will need heavy renovation work before it can be in an operational state to generate the maximum amount of rental income.
So, comps are more of a supplementary step that can make it easier for you to determine the value of rental properties to help you make a decision.
It can give you a general overview of the properties’ performance so you can narrow down your options when considering investment properties.
It will save you a lot of time that you would otherwise spend on analyzing properties with a lower-than-average performance.
Where to Find Rental Comps
If you’re a new investor, you might be asking yourself, “Where can I get rental comps in my area”?
Fortunately, there are a number of ways to access rental comps.
Traditionally, you would need to drive around the neighborhood and collect information about each property, create a spreadsheet, input all the information that you need, and then compare the properties.
Nowadays, however, you can work with a real estate agent, property manager, leasing agent, and even your fellow investors to get access to this information.
You can also find online sources to obtain comparable listings. Remember that such options will require you to pay a certain fee. The additional expense will be worth it if you’re getting more information about the investment property.
However, some platforms charge high fees but offer only a few services.
The best websites to find such type of information online include the following:
The MLS
Licensed agents use multiple listing services to keep track of all movements that happen in the world of real estate. Although only licensed agents and realtors can access them, it is the main source of data for real estate investors in the US.
It means that even if you’re not directly accessing the MLS, you will want to find sites that use it as their data source so you only get the most accurate results.
Whenever a buyer’s or a seller’s agent closes a deal for a client, they update the information on the databases where the subject property is listed.
As an investor, if you’re working with a licensed agent, you can ask them to provide you with comps from the MLS, but keep in mind that agent services come at a price.
Zillow
As one of the most popular online sources for real estate data, Zillow’s platform is an excellent resource for investors who are looking for large amounts of free data.
Although their data is not always up to date or accurate, the market insights and other details that Zillow provides about their listings add great value to any investor.
The biggest downside of using the platform, however, is that it can feel overwhelming to beginner investors. Mainly, it is because all the data found on the platform may not be relevant to a newbie.
Professional investors, on the other hand, know which data is valuable and which is not, but will sometimes criticize Zillow’s data for its inaccuracy in some cases.
Mashvisor
If you’re looking for a more reliable, flexible, and easy-to-use source for rental comps, Mashvisor is an excellent option. It is an online platform that provides real estate analytics, projections, as well as comparable data for investment properties that you can turn into rental properties anywhere in the US.
Mashvisor provides access to data for comparables that you can easily download using its Export Neighborhood Report functionality.
You can also set a number of filters to customize the type, size, age, and many other features of the properties that you want to compare. Then, you can download a CSV file containing all the details and info that you need about these properties so you can compare them accurately.
What Makes Mashvisor a Top Choice for Finding Rental Comps
By going to any neighborhood analytics page on Mashvisor’s platform, you can find a rental comparables section that will show you properties that are similar to one another within your neighborhood of choice.
The section includes the ratings of the rental properties, as well as their occupancy rates, average income stats, and other necessary information so you can compare them in greater depth. It allows you to identify potential challenges. Afterward, you either come up with an effective solution or move on to another subject property.
One of the best features is that Mashvisor’s algorithm will look at each property’s details and draw a comparison on your behalf.
As you can see in the screenshot below, the comps will include a similarity score based on all the data we gathered from private databases and elsewhere.
Mashvisor’s Comparable Rental Listings table showcases the similarity rating and other key metrics.
Finally, if you visit any property’s page, one of the several features that you will see on that page will be a table of similar properties within the vicinity and their information.
It shows you important details such as previous sales, which you can use for planning your rental strategy or even for setting competitive prices for when you sell your property.
While the data isn’t free, it is an invaluable asset for investors who are looking to make quick decisions using our website.
Get started on your 7-day free trial with Mashvisor today to get access to rental comps and get you on your way to a thriving real estate investing career.
How to Value Investment Property in 3 Steps
It’s important to emphasize that rental comparables are not enough to analyze your future investment on their own.
In order to get the most accurate projections and secure your investment’s success, you want to make sure that you formulate a solid plan based on accurate calculations and analysis. It means that rental comparables are only a tool to help you find the right house or apartment to buy in a specific area.
But to understand whether that property will be profitable or not, you will need to analyze its future return on investment, which rental comps can’t do.
So, to analyze your investment, there are certain steps that you should take. Ideally, you should perform them first before doing the comps, regardless of your strategy and planning.
Step 1: Rental Market Analysis
A market analysis is typically the first step in analyzing your investment and determining the value of an investment property. It is because the value of a property depends on the market that it’s in.
Rental comps are a crucial part of the market analysis, as both neighborhood and investment property analysis rely on comparing properties and determining averages.
A market analysis, however, is a much broader term, and it doesn’t necessarily focus on smaller neighborhoods as comparables do. Instead, it gives investors like you an idea of the general performance of a city or district based on property prices and market direction (buyers’ vs sellers’ market).
Most investors look at different markets’ analyses before choosing the market in which they want to invest. The decision-making process can either depend on the house prices compared to your available budget, the rental rates compared to your desired outcome, or a combination of both.
Of course, there are plenty of apps and sources that typically provide free forecasts about the performance of different markets across the US.
Step 2: Cap Rate Analysis
After running comps and analyzing the market, investors will typically do a cap rate analysis.
The capitalization rate is a metric real estate investors use to calculate the rate of return on investment of rental properties. The cap rate is an easy-to-use metric for analyzing properties and markets alike and is also used in running comps.
To calculate the cap rate, all you need to know is the net operating income of a property and its price. By using the said information, you can learn how much the rental income of a property makes up of its total price, and how long it would take the property to generate that amount in profit.
The formula for calculating the cap rate is as follows:
Cap Rate = [(Net Monthly Income x 12) / Property Price] x 100
While investors mostly use it for analyzing individual properties, the same logic applies to analyzing a particular market or comps to get an idea of the potential for returns.
Although the private databases don’t provide data on each listing’s cap rate, Mashvisor’s platform takes data from them and uses it to calculate the cap rate for each property and market.
Step 3: Cash on Cash Return Analysis
Similar to the cap rate, the cash on cash return is another metric real estate investors use to project the return on investment that a property can potentially generate.
However, the main difference is that while the cap rate relies on the property’s market value, the cash on cash return is more personal. The latter relies on the amount of cash that you specifically will pay out of your pocket.
For this reason, unlike the cap rate, the cash on cash return isn’t an efficient metric when it comes to using it in running comparables or analyzing markets. However, it’s very useful in helping make the final decision once you’ve figured out your finances and when you already have a few properties to choose from.
To find out what the cash on cash return rate is for a property, you take the cap rate’s formula and replace the property’s price with the amount of cash you’re paying:
Cash on Cash Return = [(Net Operating Income x 12) / Cash Invested)] x 100
Of course, it means that if you’re using a mortgage or borrowing money to buy the house, you will only include the amount of down payment and closing costs that you must pay in cash.
Bottom Line
Using rental comparables as part of your investment property analysis can be beneficial. It is because rental comps help you understand the potential of properties in each street or neighborhood.
They’re also an excellent way to forecast tenant demand in an area. It will ensure that you’re investing in a house or apartment that will realize a high occupancy rate. Additionally, they can also help you decide how much rent to charge without going overboard with your rate or undercharging your tenants.
Generally, rental comps are a great way for you to find investment properties in an organized and efficient manner. They allow you to narrow down your search and cut through large numbers of houses that aren’t worth your time and attention.
By identifying a few investment properties that have performed well in their neighborhood, you’ll be able to further your analysis. You easily determine the one that would make a good investment.
Using a website like Mashvisor will give you access to different types of rental comps. Also, you will also be able to use a large selection of tools and features throughout your investment journey. Mashvisor is a very useful website for all types of real estate investors, whether you’re searching for a property or closing a deal.
Furthermore, it is also a helpful tool for monitoring the performance of an investment property. You can even see how it compares to other properties in the immediate vicinity.
If you’re looking to find a house or apartment, Mashvisor’s database includes listings from the MLS. You can even give it a try for free.
Learn about how Mashvisor can give you access to rental comps and locate the best deals in the most profitable markets. Sign up for a 7-day free trial now, followed by 15% off for life.