Every real estate investor must do their homework before deciding to purchase an investment property. A Rental Market Analysis (RMA) must always be included in the research when evaluating a property. This type of analysis will show whether a property will be a good investment, and also where you are likely to find the best, most profitable properties.
A RMA takes a bit of time to gather all of the information, but the process itself is not difficult. Every real estate investor must learn these five steps and do an RMA before they buy any property.
Evaluate the Neighborhood
It can be easy to find real estate data for cities, but to properly analyze a property, you must gather data at the neighborhood level. Different areas of the city can have drastically different attributes that will make one neighbor extremely profitable for investors, while nearby neighborhoods may have to be avoided.
Neighborhoods that are desirable will have characteristics that will make people want to live there. For example, access to public transportation, good schools, easy access to shopping and dining and nearby amenities such as parks, libraries and entertainment or cultural venues are all found in neighborhoods with profitable rental properties.
You can also tell a lot by a neighborhood just by walking or driving through. Spend some time in the neighborhood and note what you see. Do the houses generally look clean and well kept? Are there plenty of open businesses? Do the streets and other public areas look well maintained? Answering no to these questions should be a warning sign that rents will be low and turnover in the rental units will be high, and possibly it will be difficult to find well qualified tenants regardless of the rent prices altogether.
Identify Comparable Properties
Once you have identified a neighborhood that looks like it will be a good place to start investing, you need to find comparable properties to the one you are looking at. A property manager or real estate agent may have recent and accurate data and will be able to help, but finding the information yourself is not hard and is a skill every investor should learn.
You may find information on comparable properties on sites like Zillow or Redfin, or you can gather it yourself by looking at local rental listings. Find properties with similar sizes, number of bedrooms and bathrooms, lot size and in a similar condition to the one you are looking at and note what those properties are renting for.
You should try to find at least three properties that are comparable to yours to get the most accurate data. It may be a good idea to enter all of the information into a spreadsheet so it is easy to analyze later. The spreadsheet should contain columns for the address, and each type of data you have collected.
Calculate Rent Per Square Foot
After you have collected data on several properties, the next step is to crunch the numbers and calculate the rent per square foot. There will be a bit of estimating on this step as you likely will not have exact data on the square footage of each comparable property, but you should be able to get fairly close.
Once you have estimated the square footage, divide the monthly rent by the area and you will have the rent per square foot for the neighborhood you are looking in.
Next, use this formula to estimate what the market rent will be on the property you are considering purchasing, but we are not quite finished and there are still some adjustments to make.
Adjust the Rental Price
There are two adjustments that must be made to the calculation. First, you may have to adjust the price up or down depending on the amenities that your poetry has or does not have. Many multi-unit buildings may feature on-site fitness centers, swimming pools, security systems or other conveniences that will increase the rents. If your property has these and your comparables didn’t you will have to adjust your rent upwards or vice versa.
Inside of the units, however, features such as newly remodeled bathrooms or gourmet kitchens tend to be much less favored by renters than by home buyers. If your property has one of these items, do not plan on being able to collect much more rent on it than you otherwise would.
You now have a good idea on what your monthly rent will be, but there is still one more adjustment to make. You have to account for vacancies and turnover. Simply multiplying the monthly rent by twelve will not quite give you the annual rent. A good rule of thumb is to plan on your unit being vacant for between 5% and 10% of the time.
Determine the Cost of the Rental Property
Now that you know what kind of rental income your property will generate, you can determine what price you should be willing to pay for a listed property on the market. If you know that a property will generate $3,000 in monthly rent, and the mortgage payment, property taxes and insurance exceeds that, it’s probably not going to be a good property to purchase. You will want to find a property where the estimated rents, after accounting for vacancies, leaves you with a positive cash flow. It’s different for every landlord, but most will want a monthly profit of about $100 to $200 per door.
We provide a complimentary rental market analysis to anyone considering hiring us as your property manager. We have plenty of accurate data to pull from and would be happy to give you an accurate idea on how much income your property will generate. Give us a call or fill out our online form and one of our professional property managers will be in touch with you.
Want to learn more? Visit our Essential Questions page or learn more About Us. Ready to talk? Consult with us today!