The Rental Market Analysis (RMA) is a tool for figuring the income from a rental property, either a property you already own and wish to rent out or the potential revenue generated by a real estate investment you’re considering purchasing. There are usually five steps in a proper rental analysis:
- Evaluate the neighborhood. The classic primary joking rule in real estate has always been three rules: Location, location, location. This is true here as well, as both the location of nearby businesses, schools, and various forms of infrastructure (like highways and noisy fire stations) are all factors in the property value. Consider the character of the neighborhood. Run-down properties, litter, or beat up old cars parked on the streets with people working on them is a clear sign of falling property values. While checking out the neighborhood, look at properties that are substantially similar to yours for comparing. Note the addresses of at least three.
- Identify comparable properties. Zillow, Costar, and sometimes government tax websites are valid places to look up values of comparable properties (comps). If you only want to compare rental prices, you can search Zillow, Craigslist, google rentals in your zip code, check with a local realtor or property manager, or call the offices of properties you’ve seen.
- Calculate price per square foot of the comparable properties. Property listings always include square footage, and once you know the square footage of the comps you wrote down and each one’s rental price, you can quickly figure out the price per square foot.
- Modify the rental prices for amenities. If your comps don’t include a pool and your building has one (or other variations of available amenities), you’ll need to adjust the prices to reflect the value accurately. Typically there are two types of amenities:
- Community amenities that benefit (and are shared by) everyone in the complex. Examples include covered parking, a game or a party room, or an exercise room.
- Unit amenities that only benefit people in individual units. Examples would be things like a fireplace, balcony, washer/dryer, or other upgraded appliances.
Other factors to consider include the area’s vacancy rate. High vacancy rates will drive rents down, while a hot uptown area full of younger renters can be a cash cow.
5. Determine the cost of properties for sale. The amount of property available for purchase in an area is called the available inventory. If there are many buildings for sale, prices for rent can be more volatile. If the available inventory is low, there will be less competition on price.
Why a rental market analysis is important
A rental market analysis is essential so you correctly set a price that will attract good renters and still cover your costs. One rule of thumb is to charge around .08% of the value of the property in rent.
Don’t set the rate you want, but the price you can actually get.
If you set the rent too high, you’ll have a higher vacancy rate, which is costs you money every month a unit sits empty. Also, current tenants might be tempted to move to cheaper places if they can save a significant amount of money but keep the same standard of living. Without a careful rental analysis, you might lose money every month and not know why.
Uptown Dallas Properties, a professional property management company, specializes in all aspects of rental property marketing, management, and maintenance. Get your free rental analysis by clicking below.