Rent Comparables: Why are they so important to the multifamily underwriting process!
A rent comparable or “Comp” as you may hear, is comparing similar properties in the area and evaluating what they are charging for rent. Investors heavily rely on running a rent comparable analysis to help determine what a property could achieve in terms of rent. For example, let’s say your building is charging an average monthly rent of $700/month but competing, comparable properties in the area are all charging an average of $1,000/month. This means that there is room for improvement to achieve what the other apartments in the marketplace are renting for, also known as Market Rent. The question then becomes, “Why isn’t your building achieving market rent and how do you get your units to that level?” To answer this question, we need to dig deep into comparable properties in the area. What does a comparable property mean though? Well, a comparable property is one that has similar criteria to others in the area. Below is a list of some of the criteria: · Location · Year Built · Amenities · Number of Units · Number of Stories · Style · Building Structure · Square Footage of Units · Interior · Exterior · Unit Mix (1 Bed 1 Bath Vs. 2 Bed 1 Bath, etc.) · Services When comparing rents to other properties it is crucial to make sure that you are looking at an apples to apples view. That means making sure your building has similar criteria to the competing properties. Let’s look at a couple examples to get a better understanding of this. Let’s say your building is identical to another few in the area. All the criteria match, but your property charges an average of $800/month in rent while the competing properties charge an average of $900/month. This is a great indicator that the property is poorly run and with professional ownership, your property can increase rents to market levels without any additions. Now, let’s assume your property charges an average of $800/month in rent while the competing properties charge an average of $1,000/month. All the criteria are the same between the properties except for the fact that your property’s interior is outdated while the competing properties have brand new appliances, vinyl plank flooring, new cabinets, fresh paint, and quartz countertops. This means that the interior criteria must be adjusted in order to achieve market rents. Now you know how to reach market rents for this situation as well as what renovations will need to be done. You can use that information to adjust how much money you will need for the project and be able to forecast its potential income. Whether you are actively acquiring a deal or passively investing in one, make sure that you keep an eye out for the rent comps that are being used. Comparing truly similar properties is essential to forecasting what market rents can be for your building, which in turn affects the investment returns. This is not a step to take lightly so perform proper due diligence and take your property to the next level!