Details of Daily Deals
Rental Market Evaluation
The value of the location of a rental property involves more than just its zip code. For many renters, proximity to schools, parks, public transit, colleges and retail are important considerations. If the rental is in a planned urban development with neighborhood amenities, it should be close to pools and tennis courts. In areas where many occupants must commute to their jobs, proximity to freeways and public transportation can be a deciding factor. Unlike homeowners, who are willing to sacrifice location to purchase an affordable home, many renters might not have the flexibility or desire to do so.
Conduct research on how much money landlords are able to charge for rent in particular areas. Check rental listings in the area. Find ones that are most similar to your desired rental in type (apartment or single family), number of bedrooms and baths, square footage, lot size, age, upgrades, amenities and location. Also, drive through the neighborhood looking for rental signs in case they haven’t been listed or advertised. Contact the landlord or management company to see the property from the inside as well as the outside. You also might be able to view pictures of the interior online. In addition, ask property managers in the area for advice on rental pricing. If you find that a rental listing seems more expensive than comparable units in the area, find out how long it’s been unoccupied. If it has been empty for several months, it might be overpriced and should not be part of your analysis. For owners of rental units, the rent you charge should be in line with units like yours. Rationalizing an unjustified higher price can lead to a monthly net loss when you have to lower your rate to find a tenant.
Price Per Square Foot
Compare the rental price per square foot of rentals in your area. This is important if you cannot find other tenant-occupied properties that are the same size, or have a similar number of bedrooms and bathrooms. To determine the rental rate per square foot, divide the monthly rent by the square feet of living space, excluding garages and sheds. For example, a rent of $1,000 per month, divided by an 800 square-foot unit, is $1.25 per square foot. If you have three bedrooms with two bathrooms, and the closest comparable rental is four bedrooms with three baths, use the rate per square foot to determine how much you can charge for rent. If the units are the same size, your rent should be slightly less than the price per square foot of the rental with one more bedroom and bathroom.
Include area vacancy rates in your rental market analysis. The amount of monthly rent you can charge only is one factor in determining the return on your investment. The other is factor is how easily you can keep the unit at that price and still attract tenants. After all, units that sit empty for long stretches of time aren’t bringing in any revenue. Knowing the total amount of money you collect in a year is vital to an accurate calculation. The United States Census Bureau publishes vacancy rates by state and by large metropolitan areas. Compare your rental unit to the closest area on the list. For example, if your rental is located in Escondido, Calif., use the vacancy rate statistic for “San Diego-Carlsbad-San Marcos, CA” to estimate how often your unit will likely be occupied during a 12-month period.
To determine if an investment property will give you a reasonable return on your investment, calculate the capitalization rate. First, determine the amount of estimated rent you can earn, then subtract the average vacancy rate. If you collect $1,000 per month, that’s $12,000 annually. If your area vacancy rate is 10 percent, subtract $1,200 from your yearly total, so your gross income is approximately $10,800. Next, add your estimated monthly expenses, such as utilities, taxes, insurance, homeowner association fees and repairs, if any. Multiply them by 12 months. Your mortgage loan payments are not included in this equation. Subtract total expenses from your annual gross income to derive your net operating income, or NOI. For example, if your expenses total $3,600 a year, your NOI is $7,200 ($10,800 minus $3,600). For an indication of whether a property is a good investment, calculate the cap rate by dividing the NOI by the sale price. If the purchase price is $100,000, your equation is $7,200/$100,000. This gives you a 7.2 percent cap rate, or return on your investment, before factoring in your mortgage payments. If the cap rate is too low — such as under 5 percent — the sale price might be too high and your return might not cover annual emergency expenses or a higher-than-average vacancy rate.
Even after careful analysis, the amount of rent you charge is ultimately determined by the number of interested applicants. After you close the transaction and buy the unit, make sure it is in good condition and ready to rent (fresh paint, working appliances, etc.). When it rent ready, advertise the unit in local newspapers and online rental websites. If there are ample inquiries from qualified prospects, your market rental analysis was probably accurate. However, if you do not receive enough responses to approve a tenant within 30 days, you might have overestimated the amount of rent your particular market can bear and should consider lowering the price to occupy it quickly.