Mastering Rental Comps for Smarter Real Estate Investments

June 13, 20238 min read
Mastering Rental Comps for Smarter Real Estate Investments
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Key Takeaways

  • 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.
  • Rental comps are different from other real estate analysis techniques in that they home in on a very specific market’s current performance.
  • 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.

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.

What are Rental Comps?

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.

Types of Rental Properties

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.

Rental Comps: Key Factors to Consider

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:

Location

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.  

Property Characteristics

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.  

Market Trends

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.  

How to Find Rental Comps

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:

  • Zillow. This platform, one of the most popular digital sources for real estate data, is a great resource for investors seeking a lot of free data. While the site might feel overwhelming to novices, and the data is not always current or accurate, Zillow’s listings can still be of significant value.
  • Mashvisor. This user-friendly site does offer reliable data in the form of real estate projections, analytics, and comparable data for investment properties in the U.S. that can be converted into rental properties.
  • Rentometer. This site provides free as well as paid pricing plans for comparing rent or intended rent with similar area properties, depending upon the amount of detailed analysis needed. Comparing rent prices is as easy as plugging in the property address, rent price, and number of bedrooms and bathrooms. 

Metrics Used to Evaluate Rental Comps

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.

How to Utilize 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.

Common Pitfalls to Avoid When Using Rental Comps

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:

  • High population growth
  • Low crime rates
  • A good price to rent ratio
  • A growing job market
  • Proximity to schools, restaurants, hospitals, etc.
  • Future development projects
  • Access to public transportation
  • Low insurance costs and property taxes

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.

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A Rental Comp’s Investment Opportunity

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. 

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

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.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

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