Every real estate transaction is, to some degree, a gamble. But professional rental management companies have a few tricks up their sleeve that help put the odds in your favor.
One of the most important is performing a detailed residential rental market analysis on every potential investment property. This process is one of the greatest tools to determine if a potential investment property is a gold mine or a dud. Here’s how it works.
What Is a Residential Rental Market Analysis and How is it Used by Rental Management Companies?
In a nutshell, a rental market analysis, or RMA (you might also hear it referred to as a comparative market analysis, or CMA) is the study of the current market values of properties. Rental management companies and other real estate professionals use it to evaluate the potential of a specific property, and determine whether or not it’s a good investment.
At its most basic, a rental market analysis involves finding and analyzing properties similar to the one you’re interested in buying, and seeing how they stack up. But of course, there’s a lot more to it than that.
The residential rental market analysis process
A lot goes into a detailed rental market analysis. From researching your local real estate market and making market predictions based on current trends, to finding rental comps and conducting a neighborhood analysis; rental management companies use all the tools at their disposal to determine whether a particular property is a good investment. The process looks something like this:
Conduct a property analysis. Before you start looking at the surrounding area, take a good hard look at the property you’re interested in. Take into account any factors that may influence how much you can earn from the property, such as its square footage, land area, amenities, number of bedrooms and bathrooms, construction age, and any recent improvements.
Evaluate the neighborhood. Look at the surrounding neighborhood. Does it have access to good schools, amenities and public transportation? Do the houses look well-kept? What is the crime rate? Are nearby rentals occupied, or are they largely vacant? All these factors come into play.
Identify comps. One of the most important steps is to find comps—rental properties in your area that are comparable to yours—and analyze them. Look at properties that are either currently on the market or have sold within the last year in your neighborhood. You’re looking for properties that are much like yours in age, condition, square footage, number of bathrooms and other characteristics.
Calculate rent per square foot. Use the rental rate and square footage of comps you’ve collected to determine their rent per square foot. Using the resulting rate, along with the square footage of your property, you should be able to calculate how much you can rent it for.
Adjust for amenities. This is a significant factor that may cause you to adjust your rental rate. Be sure to consider any unique amenities that might make your property more attractive, such as off-street parking, a pool, extra security or pet-friendly units.
Consider occupancy rates. Look at the occupancy rates of comparable properties as well as your own. In multi-unit properties, low occupancy rates can be a sign of trouble. But remember that some properties, like vacation rentals, may be occupied only during certain times of year.
Factor in costs. Don’t forget to weigh in the costs associated with your rental property. These include renovations, maintenance, utilities, mortgage, taxes and insurance.
Looking for more information on how to perform a rental market analysis? Contact us today to learn more about the tools rental management companies use to help property owners like you succeed.