Every landlord or property manager should keep a constant eye on their local rental market. Knowing what shifts occur in the market helps you make appropriate changes with your own property. An important tool for this is rental comps. Rental comps apply to you, whether you are looking to purchase a rental property, or simply want to analyze your current property.
What Are Rental Comps?
The term ‘comp’ (short for comparables) is used when discussing the listing values of properties on the market. Properties are compared to each other to determine their values. This allows a landlord that is looking at buying a rental property the chance to determine the best property to purchase. Alternatively, it can give landlords that already have a property the chance to figure out a good starting point for what they should be charging for rent.
Based on a property’s market value, landlords can generally get from between .8 to 1.1 percent of that property’s market value. A $100,000 house could fetch anywhere between $800 and $1,100 per month in rent. However, to determine an appropriate amount of rent for your property, some research is needed. This is where rental comps come into play.
Using Rental Comps in Property Management
The process of putting together rental comps is similar to creating a CMA, or comparative market analysis. You want to be sure to compare the metrics that are most relevant to you and your property. This is particularly key when you are trying to determine what to charge for rent.
You will want to compare your rental property to others in your area that are similar. For example, if you have a two-bedroom, two-bathroom house with a yard, you would want to look at other rental properties that have those same traits. Looking at what those comparable properties charge for rent helps you to maximize the value of your rental property. The rental comps also help to ensure that you are charging fair market rent.
Rental comps are typically put into Excel sheets or table formatting for easy sorting and comparison.
Determining Comparable Properties
In order to find appropriate comparable properties, there are some key details to pay attention to. In order to compare properties, you need to make sure each property is as similar to the other as possible. This is going to include details such as the number of bedrooms and bathrooms, indoor and outdoor square footage, whether or not it is pet-friendly, and any additional amenities like a pool. Location is another important piece of the puzzle to pay attention to and all comparable properties should be in the same place. All of these properties should also have similar access to nearby transportation options and amenities.
Properties should also be built within a five-year range of each other to help give you as accurate of a comparison as possible. Generally, finding four to five similar properties should be enough to form a decent rental comp. If you are having trouble finding good matches in your area, choose the properties that are the most similar and increase the number of homes you put in your rental comp for a better average.
Using Rental Comps to Purchase
Once you have your list of similar properties, you will want to compare them based on the area’s average performance in order to identify the ones that are above average. An example of this would be if three properties are similar in basically all aspects, but one has a higher average rental income than the other two. If you are looking to purchase, that would be the better choice, or if you already have a property, figure out what that one has so you can modify or advertise your property accordingly.
If you are looking at purchasing a property, make sure you do more research than just rental comps. A property may look great on paper with a low listing price and average or above-average rental rate, but when you actually inspect it, the property is actually in poor condition and needs heavy renovations done before it can generate that much income.
Rental comps are a supplementary step, whether or not you are looking to purchase a rental property or looking to determine your monthly rent. You shouldn’t base your entire decision on them, but they are a key piece of the puzzle. They help you to find properties to analyze further and save time you would otherwise spend looking at properties with poor performance.