Real estate investors and those looking to maximize returns on their rental property would do well to understand rental comps, which can fortify cash flow while attracting top-shelf tenants. Here are rental comps: what they are, how to find them, and how to utilize them.
Rental comps are listings of comparable rental properties that can help investors know an area’s rental market performance. Ultimately, they can help determine an investment property’s value.
Such “comps” are used by real estate investors and rental property owners to compare area properties of the same type, and which have a similar square footage and number of bedrooms and bathrooms. Rental prices are also compared.
Essentially, rental comps are used to compare similar properties in a neighborhood to gain insight into the market performance of long- and short-term rentals.
Rental comps are different from other real estate analysis techniques in that they home in on a very specific market’s current performance. Meanwhile, other analyses attempt to predict a property’s or market’s future performance.
In real estate, there are two primary types of rental properties: long term and short term. With the long-term strategy, the most common of the two, landlords lease their properties for at least six months at a time, with most rentals having year-long contracts. Investors typically use the long-term strategy as their baseline for comparing properties.
Owing to platforms such as Airbnb, short-term rentals have gained in popularity in recent years. This category includes properties such as vacation homes, which may be riskier, but can yield higher earnings.
The issue with short-term rentals is that using comps is more difficult due to the higher tenant turnover rate, rendering future performances more challenging to predict. Compounding matters is the fact that Airbnb properties do not have fixed daily rates, which are often adjusted based on the season and demand.
The chief purpose of comps is to compare similar rental properties so the investor will get an idea of the amount of income a property will likely generate. Still, there are important factors to consider when it comes to rental comps:
When doing an analysis, be certain to enter a specific location such as a neighborhood or street, as opposed to searching, say, “rental comps near me,” for more accurate results. Private databases will typically include the zip codes in which the investor is interested. If that search is unsuccessful, the investor can use specific addresses to find properties and group them according to their location.
Comparing properties of similar size, property type, and number of bedrooms and bathrooms is key, so that the comparison is “apples to apples.” Parking type – street, carport, or garage – should also be a consideration, as should any amenities such as appliances, landscaping, and any renovations or improvements. A swimming pool or play area can also be considered.
It is essential to keep up with market trends in real estate. After all, accurate real estate pricing can result in faster rentals and better performance. So, investors must keep an eye out for any consistent change in the general direction of the industry.
In the past, comparing properties required driving around a specific neighborhood and gathering information about each property, putting together a spreadsheet, and inputting data.
These days, there are a number of ways to track down rental comps, including through local real estate agents, property managers, and online platforms and websites dedicated to rental listings and data. Note that some online sources will require a fee for perusal.
Other possible sources can include a real estate agent, leasing agent, property manager, and maybe even other investors.
Resourceful websites include:
There are key metrics that are used to assess rental comps. For one, investors must determine market trends — whether rents are increasing or decreasing, the median age in the community (most renters are younger people), the percentage of renter-occupied households, and median household and per capita incomes. Average rental rates and price per square foot are also key items to include in rental comps.
Setting a price that balances income and tenant demand is a challenge for many rental property investors. If the rent price is too low, the risk is a negative monthly cash flow. However, setting the price too high might dissuade prospective tenants, possibly leaving the investor with an empty unit. Rental comps permit investors to make pricing decisions based on data – not emotion.
Investors must also constantly adapt to market trends. Yes, investors must study historical market trends in the neighborhoods in which they are interested. However, such trends can and do change. When that happens, investors must be prepared to make changes.
Then there is evaluating the rental income potential of an investment property. Such assessment hinges on various factors, including location, the local economy, the property’s condition, and any necessary financing.
There are some common pitfalls to skirt when using rental comps, including overlooking neighborhood specifics. Renting in a poor location can hurt one’s odds of profiting, because the property’s location has the biggest impact on the rate of return.
The best markets have most of the following:
Another common pitfall is neglecting seasonal variations. Searches for places to rent generally begin creeping up in January and steadily increase through to a July peak. Renters who begin their search early in the year typically take longer to move. However, they still tend to move in at nearly the same rate as peak month rental searchers, with moves peaking in August.
Investors should also be wary of excessive reliance on online data. While using data can help mitigate risk and can mean the difference between a profitable deal and a missed opportunity, investors must be mindful of out-of-date portals and inaccurate information. Also, the properties must at some point be visited in person. Doing so will help investors validate assumptions and assess the properties quality and locations.
While rental comps do have value, investors can also profit by putting capital into alternative investments – without the hassle of dealing with rentals and tenants.
Alternative investments – basically any asset other than stocks or bonds – can diminish the impact of market volatility and provide a hedge against inflation. Real estate is an alternative investment. While no investment is without risk, real estate remains popular because it can offer steady returns, predictable cash flow, and tax advantages.
Consider the leading private-market investment platform Yieldstreet, which in addition to asset classes such as art and transportation, offers non-rental private and commercial real estate opportunities. To date, Yieldstreet has funded more than $875 million in the real estate vertical.
Alternative investments also serve another purpose, and that is to diversify portfolios. Diversification can help mitigate the risk that all one’s holdings will be wiped out due to a single negative event. In fact, creating a diversified portfolio comprised of different kinds of assets is a critical element of a sound investment strategy.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Rental comps can help investors anticipate what the rent price should be for a rental property, so that they do not undercharge or turn off potential tenants with excessively high prices.
Still, there are ways in which real estate investors can reap returns – and diversify portfolios — without having to get involved with rentals and tenants.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.