Need to Figure Out Market Rents? Here’s How

If you’re considering a real estate investment, you’re probably asking yourself what the market rents are for a given property. So, how do you figure out the rental projections for a given market?

A rent study should answer that question and give you the tools you need to make an educated guess of where rents will go.

What is a rent study?

A rent study is a spreadsheet of rent comps, either asking rents or effective rents, with some basic information such as square footage and class of complex. For simplicity, multifamily rents are usually divided into “A”, “B”, and “C” class properties, and square footages can generally be found on Apartments.com or Apartmentfinder.com.

How do I conduct a rent study?

To start, determine the market or trade area that you want to study, and make a spreadsheet of various apartment complexes in the trade area. Add columns for beds/baths, SF, rent, and class of complex. You may also want to have a column for amenities, such as clubhouses, pools, and walking trails.

Now go online and see what are the asking rates for each of these units. With square footages, sometimes various websites will give you a range—I usually take the average of the two numbers in the range. Be wary of outliers! Sometimes “executive” or furnished units will throw off your numbers, but be persistent.

You can also conduct the rent study by phone. If you’re calling, you will still want to put your spreadsheet together and populate it with as much online information as possible. I always recommend being honest: Tell property managers you are conducting a rent study, and offer to send them a copy when it’s finished. (You should do this, not only to avoid being a liar, but so they will help you with comps next time.)

I usually confirm rents and basic rental details—and ask them anecdotally how many calls and showings they are receiving. How strong is demand? You might make a column where you note that although a given complex is asking $1.50/SF for its one-bedroom units, the manager gets many more calls for two bedrooms than for one. That is useful!

Once you have a meaningful compilation of rent comps, it’s time to turn it into a rent curve. I usually select the rent/SF and SF of the units in a given class (A, B, or C), and add a logarithmic trendline to those numbers. Then, I project forward a few hundred points and backward a few hundred points. This will give you a nice smooth curve that looks suspiciously like the ones from economics class (these are demand curves after all). Now you can match the units in question with their class peers on the graph, and use the information collected to estimate the market rents.

Congrats! Now you have a completed spreadsheet that looks like the example here:  Download the Example Apartment Rent Study Here

And instead of guessing, you can base your projections on hard numbers. You may also be able to find some real anomalies in the market—undermarket rents—and some diamonds in rough. Good luck!

Copyright (c)2020 This post originally appeared in Jonathan Aceves’s blog and is republished with permission.

Using Rent Curves to Study Multifamily Rental Rates

This is Jonathan Aceves with Meybohm Commercial Real Estate, advising business leaders and helping them make wise real estate decisions.  Today we’re going to be discussing Multifamily Rent Curves.  

 

How does one set out to study multifamily rental rates?  We do this by building a rent curve.  Let’s say you want to study the rental rates for housing in Martinez, GA.  We would do a survey of rental rates at apartment complexes in the area, and plot them on a graph.  The graph would start out looking like this:

Then we would separate them by class.  Class is a ranking system given to multifamily properties by investors, generally A, B, C, and D.  A properties are generally newer, amenitized, and really nice.  B properties are usually good, but maybe a little older, maybe not the same level of amenities.  C properties are in not-so-great areas, in fair condition, usually schools aren’t so good.  D properties are in bad condition and really rough areas, these are the kind that you wouldn’t go to at night.  Once you’ve broken them apart by class, you draw a curve over them.  You would end up with something like this:

 

It is interesting to note the steepness of the curve, and the distance between the different curves.  Another thing to note is that market changes shift the curves.  This is what we see in rapidly gentrifying areas—the entire curve moves out.

 

So how do you use the rent curve?  Well this helps investors identify opportunities for repositioning.  It also helps you identify management problems.  If I see a complex with below-market rents, I try to figure out why.  Is it a problem that an investor can fix?  

 

Thanks for reading!  Please like and share with those you think might benefit from this.  We’d love to hear from you! What are your thoughts about rental rates?