Updated: Jan 9
It’s a common knowledge that rent increases play a major factor in wealth creation in real estate. When investing in multifamily properties there are two ways to earn income: rents and appreciation.
The main and immediate source of wealth creation is the opportunity to earn income on a monthly basis from rents and fees, such as application fees, pet fees, etc. The second way is making money on appreciation when the property sells. One of the main goals of the sponsor is to increase the income earned from rents and fees during the period that the property is held, as well as to maximize the appreciation potential by selling the property at the highest price possible.
A multifamily value-add deal presents the opportunity to improve the property and increase rents. It’s pretty straight forward. The value-add plan may include renovation or rebranding of the property, including interior or exterior improvements that will attract renters who will be willing to pay higher rents. In a heavy value-add deal, the sponsor will reposition the property and completely change the tenant base, bringing tenants that are able to pay higher rents.
But the first place to start is to see where the property’s current rents rank in the market. The main question remains: how can an investor verify the future rent increases when they buy the property? How can they make sure their rent projections are solid? The process of answering this question and analyzing the market is called “rent comps analysis”.
View Rental Comparables
One of the first places to start when looking at rental rates is to view reports of comparable rents at other properties in the area. Compare your property to similar multifamily properties that are within 5-years of age of your property. Check rental rates on properties that are located with 1-3 miles that have similar amenities to your property.
There are services that provide this information, including CoStar, YardiMatrix and REIS, but these services can be expensive. CoStar offers real-time information and market analytics on over 400 markets and is widely used by property managers. YardiMatrix can provide rents, occupancy rates, along with short and long-range forecasts of rent and occupancy at the market level. And REIS offers a variety of analytics and research reports.
Another alternative is to use Rentometer.com. This website is free, however, it doesn’t have any adjustment to number of units and vintage, so an 8-unit apartment building can be compared to a 400-unit apartment building, which are not really comparable. The same goes to comparing a building that was built in the 70s and one that was built in 2016. Though it’s good to know what’s out there, these two building are not competing with one another and should not be considered as comps.
Another option is to call around the market to learn what rents are being charged, or visit the comparable properties to actually see what they have to offer. That’s the best way to judge comparable properties, as online photos and ads can be manipulated to make the rental unit appear more attractive than it actually is.
Look at Price Per Sq. Ft.