5 Key Steps to Determine Future Rent
When first analyzing a deal, one of the first things we look at is the current average rents. Are these average rents low, at market, or possibly too high (usually a good sign of them being too high is a higher vacancy)? Our ability to accurately predict where we can push the rents can easily make or break a deal. As you evaluate more deals in a specific market, you will have a higher degree of confidence in those assumptions. This blog will dig into the five steps we take to determine our conservative future rents.
Rentometer
A tool we like using to get an initial feel for where rents can be is rentometer. This website aggregates active public listings in the vicinity to give an average rent by type (bed count). We were hesitant to use the site because of previous inaccuracies with websites such as Zillow or Redfin and their estimates of specific home values.
With rentometer, it gives the average rent for the specific unit type. Then we can dig into specific rent comps to compare how closely it reflects the target asset. In our case, we are trying to compare square footage, price per SF, amenities (pool, laundry, gym, outdoor space, sports court, dog park, etc.), age of the property, and finishes. The comparison will never be perfect, but we hope we get at least two good comps per unit type. We do this to give us an idea if it seems like a deal that is worth digging into. One caveat is in smaller population centers, where there is less inventory. In these situations, the strategy isn’t as effective.
2. Apartments.com/Craigslist
From there, we will go to websites like apartments.com and craigslist to look up the listings for those rental comps. Those listing pages will give us further details and pictures of specific units. If we cannot find enough information on the listings, we call the complexes to find more info. For example, what type of additional fees they charge to compare that as well. We also like to secret shop the competitors to see how they compare physically and how the service is.
3. Rent Comp Reports
We will also pull rent comp reports from costar and Yardi matrix. Sometimes you will find more information about specific comps on these reports.
They report on market trends and what rent growth has done overall in the market. If you have a good relationship with a broker, they can usually pull these reports for you. Especially if it’s for a specific deal, they are working on with you. Otherwise, you can get specific subscriptions to costar or Yardi, but it does get expensive. We like comparing across all these platforms because we can dig into more when we see discrepancies.
4. Rent Survey
Then we take all this information we have aggregated and put it into an excel rent survey we created. We separate each unit type that needs to be compared. We try to have at least two comps per unit type, if not three. As you can see in the example below, some apartment complex comps will repeat or differ depending on how to compare to the subject units. Also, the current and what think the future rent per unit type is added. We determine the future rent by analyzing unit type comp rent and price per square foot. We like to see it close to the average of these comps.
Lastly, we will get a weighted average price per square foot and multiply that by the weighted average square footage to get the future rent. We like using a weighted average to give us a more accurate picture. For example, in this case, the two beds would skew our averages too much when we mostly have a one-bed arrangement. In the below example, the future rent is higher than the weighted average rent of all comps. We felt comfortable with that because our product was much newer than the median age of the comps. With this rent survey at a glance, you could get a good feel of rents in the area per unit type.
5. Property Manager Opinion
The final step would be to send all this information to our property manager to get their opinion. We will usually not get to this point until we are getting serious about a property. Usually, the manager will have other properties they manage that they can compare to. Additionally, with their experience in the area, they will give good feedback on what they think and comment on the information you provided. They are essential to confirm or correct some of the assumptions you have made. This is also an excellent opportunity to discuss what other fees we could charge to increase additional income. It’s always good to discuss in what time frame these increases and fee implementation would take place. For example, in the above, that was forecasted to be done in two years.
This is almost as much an art as it is a science. You want to make sure you set rents at the optimum point not to lose revenue and keep occupancy levels healthy. All the above steps combined should give you a clear indication of where rents should fall. We always try to be on the conservative side so that we usually beat our expectations. We already see that we will get close to our year two rents at our Norman Creek apartments in the first year. This process is continual work in process, and tweaks will need to be made to gather data in real-time by operating the complex.
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