Steps To Conduct An Accurate Rental Market Analysis
Rental market analysis helps a rental property investor in determining its viability in terms of profitability. The process involves studying the real estate market, trends of a locality, local tax rolls, running costs of property, vacancy rate, occupancy rate, etc. Investors compare the average rent of properties to their average costs to see whether the property will generate a positive flow.
Steps involved in conducting an accurate rental market analysis:
- Neighborhood Evaluation: An investment property’s location has a huge impact on its profitability potential. Location in this context refers to the evaluation and assessment of the property’s specific neighborhood. It involves verifying whether the neighborhood is desirable for potential tenants in terms of availability of public transportation, walkability score, school ratings, amenities and attractions, access to shopping and dining, safety, etc.
- Real Estate Comparables: This involves comparing the property you are interested in with properties similar in size, type, age, and characteristics. For this comparison, the properties must be in the same location and should have been sold in recent months. The process involves getting a home appraisal, involving a real estate agent, using real estate tools, etc.
- Square Footage: Calculating the square footage helps determine the livable space in the property. To calculate this, you should compare the square footage of at least three rental comparables, identify their individual rental rates and get their average. Rent per square foot is also dependent on amenities provided in the property and its condition.
- Adjust Rental Price: To determine the rental price for investment property, you will have to adjust the average rental price as per square footage. This adjustment is based on the type of amenities provided as well as vacancy and occupancy rates.
- Costs Of Rental Properties: When determining which property to invest in and the cost thereof, you will have to ascertain the housing inventory in the market and its potential to generate positive cash flow on the basis of rental expenses and carrying costs per month. Running costs include but are not limited to tax, mortgage, operational and maintenance fees and licensing. A good investment will yield a price that covers the property’s expenses and marketing costs.
- Occupancy And Vacancy Rate: Occupancy rate refers to the percentage of an year for which a rental property is occupied and the vacancy rate is the percentage of vacancy in a year. An indicator of a good rental investment is that the sum of both rates should be 100 percent e.g. if the vacancy rate is 10 percent, the occupancy rate should be 90 percent. So if the vacancy rate shoots up, it will be a sign to reduce the rental price in order to attract tenants.