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. Evaluating more deals in a specific market will give you more confidence in those assumptions. This blog will dig into the five steps we take to determine our conservative future rents.
1. RidgleLine Rent Estimator
A tool we like to get an initial feel for where rents can be is RidgleLine Rent Estimator. The estimator aggregates active public listings in the vicinity to give an average rent by type (bed count).
With the estimator, it gives the average rent for the specific unit type. Then, we can dig into specific rent comps to compare how closely they reflect 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.
2. Apartments.com/Zillow
From there, we will visit websites like apartments.com and Zillow 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 information, such as what type of additional fees they charge, to compare that as well. We also like to secretly shop the competitors to see how they compare physically and the service.
3. Rent Comp Reports
We will also pull rent comp reports from Costar and Yardi matrix. Sometimes, these reports contain more information about specific comps.
They report on market trends and what rent growth has done overall. If you have a good relationship with a broker, they can usually pull these reports. 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 should 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 they compare to the subject units. Also, the current and 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.
This is almost as much an art as it is a science. You want to ensure you set rents at the optimum point to avoid losing 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. This process is continual work in progress, and tweaks will need to be made to gather data in real time by operating the complex.