How Much Should You Charge for Rent?Jan 07, 2021
Today I want to talk to you about doing your due diligence when it comes to determining rents in a multi family project.
The reality is that this is a topic that is so simple and easy... but incredibly important to get right! I'm going to break this topic down into a few different steps.
The first thing that you want to do here is to look at the comps (comparable properties). When you're looking at the comps, you want to consider location, floor plan, and supply and demand. Let's go into those a little bit further.
Analyzing the Location
Obviously, you want to be looking as close as you can to your subject property or the investment that you're looking into. If you can get something within a 1-2 mile radius or closer, that's going to be ideal. Location is key. You don't want to go find something that's in a completely different state, obviously. And you don't want to try to find something in a different city. If you can keep within the same city, and within a 1-2 mile radius, you'll be in a great place.
The Floor Plan
If you're looking at a 3 bed, 2.5 baths, you'll want to go look at similar floorplans also within that nearby location I mentioned before. Where are you going to find them? We like to check out Zillow, Rentler, Rent-o-meter... there's a bunch of different sources out there on Google that you can utilize to see what those comps are telling you for the location that you're looking in with that similar floorplan.
Understanding Supply and Demand
The third thing that I would look at after you've looked at the floor plans, location, and comps, is looking at the supply and demand. One of the tricks that the FIG team likes to do is call on different comps, an apartment complex for example, and Secret Shop (act like we're a renter and ask questions). You can also just be upfront and let them know that you're an investor, and you're trying to figure out what the rental comps are in the area.
Questions you could ask:
How is your lease-up going? What are you getting for your three-bedroom or your two-bedroom units? This lets you dive into what similar rents and similar comps are telling you within that location.
One other thing to consider with supply and demand is employment. Employment, jobs, people that are coming to the area, all of these stats are going to help you to determine a couple of key factors...
What's your occupancy rate going to be versus your vacancy rate? Obviously, you want to be in an area where there's going to be a lot of occupancy and where there's a need for it. As you really dive into the comps, look at the location and floor plan, and call each of these locations to see what their demand is. This will help you to determine what vacancy rates are going to be, how things are leasing up, and how fast.
An Example at FIG
When the Fourplex Investment Group gets ready to leas-up a project, there are quite a few people that look into our rents. We have our land team that puts eyes on it, our sales team, and then we have our property management team. We all do this separately so that we can compare notes to make sure that we're within the right range that we need to be.
Once we find out what the rent should, we punch this number into our proforma. It's important to note that it's always best to be conservative in this number.
A good example of what we've talked about is in our Payson, UT project. The floor plan in that Payson project is a two-bedroom, two-bath, stacked fourplex unit. What we did there was call the project close by. There was a great rental comp next door to our project and they have almost the exact same floor plan.
We called that complex, asked them some questions. We asked what they're getting for rent, we asked what the renters would be paying in addition to their rent (very important), and we also asked them how many units are filled or leased up. Just by asking some of those simple questions, we had a great idea of what the demand was in that area.
To wrap things up, when you're looking at the columns, remember: location, floor plan/layout, and then reviewing the supply and demand. These are the three very simple but important things when you're deciding on rents for your next investment.