Before buying a rental property, you’ll want to ensure it’s a smart and lucrative investment. However, it can be difficult to determine the profitability of a property in any given location. As such, many investors find it beneficial to compare rentals and their amenities in similar locations before purchasing a rental property. If you want to learn more about comps for rental properties and how to use them to determine the success of your investment, just keep reading.
What Are Comps for Rental Properties?
Rental comps, or rental comparables, are a tool used by investors to compare similar rental properties within the same location. Comparing similar properties can give investors a ton of insight into the real estate market and how their property could succeed in that area.
Comps for rental properties can determine the ideal rent and how much cash flow the property may generate. Although no two homes are the same, looking at rental comps can help investors determine how well a rental might do in that location.
Most investors buy rental properties hoping to earn a profit. As such, it’s important to run rental comps before buying a property to learn more about the area and how other similar rentals perform there. Here are a few factors for investors to consider.
What to Consider While Looking at Comps for Rental Properties
Investors use rental comps to compare similar properties and estimate the profitability of their next investment. But what factors do you need to look at while comparing properties?
Well, depending on your investment strategy, you’ll want to look at the factors that will most affect your goals. For instance, if you’re investing in a rental property, you’ll want to look at the average rental income, listing prices, and occupancy rates for rentals in that area.
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On the other hand, if you’re looking to invest in a short-term rental, like an Airbnb, you may want to look at nightly rates, occupancy rates, and desirable amenities. Here’s a list of some different considerations while looking at rental comps.
- Property Location
- Market Value
- Rental Rates
- Property Type and Size
- Property Condition
Instead of looking at rental comps near you, you’ll want to narrow down a specific location. Find the street or neighborhood where you’d like to invest and look at the properties in that location to find more accurate results.
Once you’ve found a good location, you’ll want to compare the market value of properties there. Property market value is the property’s value when sold, and it can help you calculate the potential cash on cash return and the cap rate.
The rental rate is one key factor to consider while looking at comps for rental properties. Depending on what type of investment you’re planning, you’ll want to look at daily, monthly, or yearly rental income.
Property Type and Size
Next, it’s important to compare properties of similar size or those close to the size of your potential investment. Additionally, the property type needs to be considered. For instance, if you’re looking to invest in a single-family home, you shouldn’t compare it with an apartment complex.
The number of bedrooms and bathrooms is also crucial to consider while looking at comps. You’ll want to look at properties with the same number of bedrooms and bathrooms as your subject property.
Parking can majorly impact the property’s value. After all, people are willing to pay more for properties that have better parking solutions. So, look at whether similar properties offer parking garages, carports, or on-street parking.
While looking at rental comps, amenities are another factor to consider. Most people want newer appliances, nice landscaping, property upgrades, and pet-friendly rentals. After all, amenities are a huge selling point for most rental properties.
On the other hand, if you’re looking at comps for short-term rentals, you’ll want to determine the correlation between the amenities and peak rental seasons. For instance, if you’re comparing short-term rentals with swimming pool access, it may only increase the value of your property during summer.
When comparing properties, you’ll want to look at the general condition of each listing–especially if you’re looking for fix-and-flip real estate. Additionally, if that’s the case, you’ll want to determine renovation costs for a more accurate value estimate.
Why Do Landlords Need Rental Comps?
Landlords need to run rental comps for several reasons. Mainly because it can help determine the success of rentals in any particular location. Before making a large investment, you’ll want to know that it can be profitable. Here are some of the main reasons landlords need rental comps.
- Calculate Cash Flow Potential- Positive cash flow is the goal of any investment. So, before buying a property, it’s important to know how well it will perform in a certain location.
- Learn Tenant Demand- Running rental comps can also help determine tenant demand. Where are tenants looking to live, and what are they looking for in a rental? These are important to consider before purchasing a rental property.
- Determine Rental Rates- Finally, by looking at the Fair Market Rent of each property, you can determine how much you can charge for your rental property. Fair Market Rent is the expected rent for a specific property, different from the current market rent, which is the rate that can be negotiated.
Where to Find Reliable Comp Information
If you’re an investor and want to know where you can find comps for rental properties, there are several ways to access this information. Here are a few of the best ways to find and analyze rental comps, whether you’re looking online or talking with professionals in your area.
- Zillow Rental Comps
- Property Management Companies
Zillow Rental Comps
Zillow’s Zestimate feature can help you estimate the property’s rent based on available data. With over 168 million homes listed on Zillow and over 115 houses with Zestimates, they can give you a lot of updated information about the physical features of each property.
Another quick way to get rental comps is with Rentometer. Rentometer’s online features can quickly compare rent prices with nearby properties. Additionally, you can choose between a free plan for seven days or a paid plan, depending on how much research you need for your investment.
Another online platform that can give you real estate analytics, projections, and comps in your area is Mashvisor. It’s easy to navigate, and you can use filters to customize the type, size, age, and other property features you want to compare.
Property Management Companies
Finally, you can get some of the best market insight from your local property managers. Rental property management companies in Northern Virginia can help you compare similar properties and determine fair rental rates for your property.
How to Interpret and Use Comps to Determine Rental Rates
If you want to use comps to determine the profitability of your investment, it’s important to know how to interpret them. That said, there are a few steps for investors to follow throughout the process to determine how well their rental will perform.
- Have a List of 5 or More Similar Properties- First things first, you’ll need to come up with a list of 5 or more comparable rental properties. After all, a rental comp won’t be much help unless the properties are similar in features, price, and amenities.
- Compare Features- After you have your list of properties, it’s important to compare the features. Generally, the properties on your list will have similar features, like the location, property type, and number of bedrooms.
- Determine the Fair Market Value- Next, find the fair market value of each property on your list of comps. The FMV is the price that a property would sell for on the open market.
- Determine the Fair Market Rent- Then, you’ll do the same for the fair market rent. The FMR is the estimated rent for a property.
- Calculate the Cap Rate- You’ll need to find the ROI for each property on your comparables list for a fair comparison. Then, divide the net operating income (NOI) by the property value to find the cap rate.
- Find the Gross Rent Multiplier- The GRM measures the profitability of a rental property. To find the GRM, divide the property value by the gross rental income. The lower the GRM, the less profitable the property is.
How Can Property Management Help Your Business Succeed?
Successful and profitable rental properties require a ton of time, patience, and effort. But what if you have several investments with little time to manage them all? No worries! Bay Property Management Group can help.
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BMG offers comprehensive rental management services to ensure your rental business runs smoothly–even if you’re not there to manage it all. We help with tenant screening, maintenance requests, rental registration, rent collection, and more! Contact BMG today if you need rental management services in Baltimore, Philadelphia, Northern Virginia, or Washington, DC.