The rental comparable analysis is the process of analyzing similar apartment communities in the general area to determine the market rents of the subject apartment community.
As an apartment investor or apartment syndicator, the three main times you will perform a rental comparable analysis are 1) during the underwriting process when initially analyzing a deal, 2) as a part of the market survey during the due diligence process, and 3) regularly after closing on a deal.
Ideally, you’ve partnered with a property management company that agrees to perform the rental comparable analysis during all three stages — and most importantly, during the due diligence phase. However, there may be times when you will need to perform the analysis yourself. For example, if you find a deal before partnering with a property management company, if you only have a few days to submit an LOI, or if you want to perform your own analysis for comparison purposes. Therefore, you must have the ability to calculate the market rents on your own. In this blog post, I will outline the process to do so without the use of fancy property management software. All you will need is an internet connection and a phone.
The first step of the rental comparable analysis is to find five to 10 apartment communities (i.e., rental comps) that are similar to the subject property. That means they were built around the same time, are in the same submarket, and have the same level of interior upgrades and amenities. The best resource to find rental comps is apartments.com.
Once you’ve located the five to 10 rent comps, log the property address, year built, number of units, and contact phone number. Then, pick up the phone and call the property. The purpose of the phone call is to collect data required to confirm that the rental comp is similar to the subject property, as well as to collect the rental data so that you can determine the market rents of the subject property. To obtain this information, you will pose as a resident interested in renting a unit.
Here are the six main pieces of information to obtain:
One of your main goals is to obtain the rental data for the rental comp. Sometimes, this information will be listed on the rental comp’s apartments.com page. However, you still want to confirm that the information is accurate on the phone call.
If the rental comp has one-bedroom and two-bedroom units only:
If the rental comp has one-bedroom, two-bedroom, three-bedroom, or more units:
At this point, you will have the rental data for all the unit types offered at the rental comp.
One of the most important factors in the rental comparable analysis is the unit upgrades. You want to make sure that the units at the rental comp are of similar type and quality as the subject property.
When gathering the rental data, ask, “Have you performed any unit upgrades recently?” The upgrades to the kitchen and bathrooms, in particular, must match the upgrades at the subject property to qualify as a rental comp.
Additionally, ask, “Have you performed any property-wide upgrades recently?” The quality of the common areas must also match those at the subject property.
At this point, you will know the upgrades for all of the unit types offered at the rental comp, as well as any property-wide upgrades.
Another factor that must match between the rental comp and the subject property is the amenities offered to the residents. Because, like the level of unit and property upgrades, the type of amenities offered will dictate the rental rates demanded.
Say, “The amenities offered will heavily weigh into my decision to rent. What are the individual unit and property amenities?”
Examples of unit amenities are the type of flooring, washer and dryer hookup or actual washers and dryers in the unit, storage availability (e.g., closet space), pet-friendliness, patios/balconies, fenced-in yards, etc.
Property amenities can include a fitness center, clubhouse, pool, online rent payment, online maintenance requests, type of parking, common area, utilities included in the rent, etc.
Then, ask, “Are there additional monthly fees for any of the amenities you listed?”
At this point, you will know if the type and quality of amenities offered match those of the subject community.
Next, you want to know the types of concessions offered. Concessions are the credits given to offset rent, application fees, move-in fees, and any other revenue line items, which are generally given to residents at move-in.
Ask, “Do you currently offer any rent or move-in specials?” Examples include security deposit specials, rental discounts for signing longer leases, referral programs, etc.
Concessions are generally offered to boost occupancy rates. So, understanding the types of concessions offered by your competitors will give you an idea of the types of concessions you will need to offer at the subject property. Additionally, if they are offering a lot of concessions, that implies that either the demand is low or the rental rates are too high.
Understanding the rent specials offered will give you an idea of the demand at the property (which will give you an idea of the demand at your subject property).
For additional demand information, say, “I am relocating to the area in the next couple of months. Do you have any available units or is there a waiting list?” If they have a waiting list, that implies that the rental rates may be too low, and vice versa.
After the phone call, take a few minutes to take notes on the level of customer service you received. If you own the subject property or end up closing on the subject property, the person you spoke with will be your competition!
After the phone call, you will have confirmed or disproved that the property is a rental comp, keeping in mind that the upgrades and amenities do not need to be an exact match — just similar. Also, the rental comps should be similar to your stabilized subject property. That is, for value-add apartment syndications, the unit upgrades should match the post-renovation upgrades and not the current level of upgrades.
Repeat this process for all five to 10 rental comps.
After all of the phone calls, the apartments that aren’t similar to the subject property can be eliminated. For the similar ones, determine the rent per square foot for each of the unit types to determine an average rent per square foot for each unit type in the overall market. Then, you can determine the market rent of the units at the subject property using this average rent per square foot and the square footage of the subject property’s various unit types. For example, if the average market rent per square foot for one-bedroom units is $1.09 and the one-bedroom unit at the subject property is 900 square feet, then the market rent is $981.
This was a general outline for how to approach performing the rental comparable analysis over the phone. It is not an exact step-by-step guide to be followed verbatim. Instead, it should be used as a guide for what questions to ask to obtain the information you need to gain a better understanding of the market trends and the market rental rates.
Also, the results of this rental comparable analysis should be used in tandem with a more detailed analysis performed by your property management company. This analysis can be used as a starting point for the market rental rates but should not be the sole basis for purchasing a deal.
Finally, if you are just starting out, I recommend doing a few practice calls on non-rental comps to get a feel for the flow of the conversation.
About the Author:
Joe Fairless is the co-founder of Ashcroft Capital, a fully integrated multifamily investment firm with more than $2.7 billion in assets under management, and the founder of Best Ever CRE. His podcast, the Best Real Estate Investing Advice Ever Show, is the world's longest-running daily real estate podcast with more than 500,000 monthly downloads.
Disclaimer:
The views and opinions expressed in this blog post are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.