Finding Fair Market Rents & Vacancy Rates: Boots, Clipboards, And REAL Research

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I won’t quote something I recently came across, so as not to embarrass anyone. They were surely well meaning. But seriously, some of what I’ve read lately about establishing rents and vacancy rates are, um, wanting at best, and hopelessly misleading at worst. Some of the advice has been off the wall.

Here’s something ya don’t wanna do in your attempt to find out neighborhood rents.

Possibly the #1 mistake would be asking the local real estate agent. That’s not in any way a slam on house agents. I used to be one. However, knowing rents, generally speaking, isn’t in their job description. Chances are, your kid’s history teacher, who owns a duplex down the street is a far better source than the agent who sold you your home.

So how do you, a real estate investor, find out what rents are on that property you’ve your eye on? Since you’re investing real money I suggest you, or someone you trust, do the following. (Of course, this in addition to getting estoppel agreements from the tenants when you buy. Always get those.)

1. Grab a clipboard/pen/paper.

2. Head out to the neighborhood and park your car.

3. Spend as much time as possible talkin’ to tenants, on site managers, and others you see, in person, belly to belly.

4. Make note of ‘For Rent’ signs and their phone numbers, then call them while standing there. Ask the pertinent questions.

5. Make extensive notes about the interiors/exteriors of everything you see. I bring a camera when I do rent surveys. I make a note of the order of what I see, and describe the picture I took, in order to make it easier to match pics with market info.

Here are just some of the questions I usually ask:

What’s the rent? The deposit? How thorough is their background check? Do they take Section 8? In their opinion, are they under rented for the neighborhood? Silly question? Not in my experience. Many landlords, for myriad reasons, mostly subjective, keep their rents lower than everybody else’s. Sure, you’ll figure that out while doing this ‘boots on the ground’ rental survey. But how much better to hear it from the owner’s lips straight up? What’s the square footage. (take the answer to that one with a grain or five of salt)

On site managers as a breed, love to help those not tryin’ to BS them. I tell ‘em exactly who I am, and what I’m doin’. They appreciate the honesty and the chance to strut their stuff. It’s similar, only much mo betta when you run into the occasional owner occupant of a multifamily property. Think they pay attention to rents? You bet. They’re almost always pure gold.

5. Visit, in person, all the local professional management companies in the narrowly defined area. They want your business. The caveat, is they sometimes tend to understate their vacancy rates. Duh.

Try to talk with several tenant’s in a building if possible. See a maintenance guy around? They’re solid gold info machines. Take him around the corner to Starbucks and pump ‘em ’till the well’s drained. It’s more likely than not other owners in the area use him too.

The highest quality source are other income property owners. You’re thinkin’, well duh, of course. Yeah, me too. But after having read what’s available these days in some places, not one said to query income property owners themselves. Go figure. They can also tell you things only long term locals would know. Who maintains their property better or worse than others? Or, who’s experienced an outa whack string of vacancies recently. Drugs maybe? Check it out — now.

And yes, look at Craig’s List. A word to the wise though — use it as your secondary data source. Asking prices for rents are equivalent to pending sales — not worth all that much. Tellin’ potential buyers for your property that the guy down the street is ‘askin’ $1,200 for his new vacancy’ usually doesn’t cut it.

Again — amateur night.

In the end, the more time spent with your own boots on the ground, the more hard, reliable data you’ll accumulate. Can’t tell ya how many times, workin’ for the seller or the buyer, that my first hand knowledge, based upon my own size nines, made the difference. It’s called income property for a buncha reasons, not the least of which is — the value is based upon the property’s income stream, quantitatively and qualitatively.

If you don’t know the facts, you could either miss out on a good deal, buy a pig in a poke, or find yourself out of a sale you thought you had.

Over the years, I’ve saved clients literally millions of dollars both in acquisitions and sales cuz I was able to undress the other side’s baseless claims for rent. If I said rents should be higher, I always had empirical, documented evidence awaiting any skepticism. It works almost every time it’s tried.

Real is real.

The best result an income property investor is when you or your advisor does what I’ve recommended here, happily discovering the rents are easily X% below market. Talk about some pretty quick equity gain.

There’s more, but you get the picture, right? Driving the neighborhood, or Heaven forbid, askin’ the local real estate agent, is the surest way to stay woefully ignorant about what might be the most important data required for the sale/exchange/purchase of income property.

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About Author

Licensed since 1969, broker/owner since 1977. Extensively trained and experienced in tax deferred exchanges, and long term retirement planning.

7 Comments

  1. Jeff,

    Good stuff. I like the boots on the ground to find out what tenants are looking for. Is a clean yard, 2 bathrooms, bigger fridge, who knows until you ask renters out there. I do like the idea of talking to maintenance guys. Very useful in finding common repair items and ensuring you don’t have the same issues. I like these posts based on experience not NNWKIA. (no net worth know it alls).

    Jason

  2. Great guidance Jeff, particularly the point about “don’t ask your REALTOR.” That’s one thing I preach to my agents when selling investment properties … ask the experts! The experts are property managers, property owners, and current tenants.

  3. Alright, this might be a stupid question, but I’m just starting the process. If I’m working with a realtor, shouldn’t I expect her to be doing all this ‘feet on the street’ work? If I could expect that, and it was reliable, then I’d start to believe that realtors are earning their commissions. Am I being unreasonable?

  4. Danielle, this is something you should review (expectations) with your REALTOR before you choose which one you hire. My answer “Yes,” but like the Bedouin proverb warns … “trust in Allah, but tie your camel!”

  5. Jeff Brown

    Hey Danielle — It’s not only not stupid, it’s often THE question. What percentage of your agent’s business is investment real estate, and what percentage is occupied homes? Most agents deal with investors as if the client is an expert. They’re order takers. “Oh, you want a duplex in one of these two zip codes? Here’s a list — which one do you want?” Even most of the investment agents don’t do this. It’s a time suck to be sure.

    I’d encourage you to grab a clipboard, your Asics, and try this yourself. Joe’s comment was also great advice.

  6. Peter Haymond on

    Jeff,

    I’m only 22 but I know that agents/realtors/brokers are in the business of “sales” and not the business of “investing” which was quite funny to me when one buyer was talking to a realtor I was working for last year and asked him, “do you think the property values in Danville, CA will go up later this year?” Well you can guess the answer but the realtor closed that sale and is a top realtor in the area for a reason.

    The team of investors I work with do the same work you do, I just hate doing it sometimes but it’s nice when you have other investor friends in the area you can just call up and ask them questions about their rental rates instead of door knocking russian immigrants rental homes in Sacramento.

    Peter

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