I have a stupid question again

[Ying Tang]

Hi BP Community,

I have a question that might sound basic, but I’d really appreciate some insight: How do you accurately estimate market rent?

I’ve been looking into several multifamily properties lately. Seller agents often say the current rents are unreasonably low because the tenants have been there for many years—some over a decade.

To estimate market rent, I’ve been looking at nearby rental listings. The challenge is, most available comps are apartments that are fully furnished and appear much nicer than the multifamily units I’m analyzing. Normally, I would think apartments rent for less than houses or duplexes, but in this case, since they’re furnished and more updated, could they actually rent for more?

I’ve also looked at single-family homes and townhouses in the area. Unfortunately, most SFR listings don’t include interior photos, so it’s hard to assess their condition compared to the multifamily properties. As for townhouses, I assume they might rent for slightly less or about the same as multifamily units—maybe due to smaller lot sizes or shared walls?

In making comparisons, I’ve been trying to account for:

• Number of bedrooms and bathrooms
• Square footage
• Property type
• Furnishing
• Condition (as best I can determine)

A few questions I’m still unsure about:

• How much does the age of a house affect rental value, percentage-wise? For example, does an older property that’s in decent shape rent noticeably lower than a newer one with similar size and layout?
• What do you do if there are only a dozen listings in the same zip code? How far out is reasonable to go when looking for additional comps without skewing the numbers too much?
• Do you exclude outliers when estimating rent—like listings that are way above or below everything else?

Would love to hear how others approach this kind of rent analysis. Thanks in advance!

[Greg Scott]

This is not a stupid question.  It gets to the core of underwriting. 

Underwriting a property is part art and part science.  Math is easy.  What is harder is answering questions like the one you are posing.  Often, there is no scientific way to get to the answer.

We own two properties in a B-class market.  In this market there are two newer properties with much higher rent.  All the other properties of similar age and have much lower rent than ours.  If you are just doing math, you would conclude there is no possible way our properties can get the rent we are getting.  And yet, we do.

From an operational perspective, we simply keep trying to make our properties better and better over time.  If we find that our occupancy is pushing close to 100%, we start raising rents.  We raise them until we start having trouble leasing and then stop.  Sometimes  occupancy drops below where we want it.  Then we may lower rents.  Other times we identify ways to make our property even more desirable.  Sometimes that is improving the unit interiors, sometimes improving curb appeal, sometimes adding amenities, or numerous other actions.

So, with the property you are analyzing, what can you do to improve rent?  That is the art of it.  It sounds like one solution is to furnish the units.  Look at the condition of that property.  Does it look like junk?  If you made it look better, do you think you could increase rents?  Is there a key amenity missing that other properties have?  How could you differentiate your property from the others to provide a unique market proposition? 

There is probably not a mathematical answer to your question.