Rental Market Analysis (RMA): The Investor Guide

A rental market analysis (RMA) helps investors assess the rental potential of a specific property. It’s created by researching comparable rental properties and amenities, evaluating the location, and calculating the average rent prices. This research and data will clearly display whether a potential property will be cash flow positive or negative and whether it is the right investment for you.

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What Is an RMA & Who Benefits From It

A rental market analysis (RMA) is a rental market forecast that evaluates specific criteria to help you determine the rental potential of a specific area and property. An RMA is a valuable tool used by real estate investors to evaluate potential long-term rental investment purchases and vacation rentals.

A rental market analysis is similar in concept to a comparative market analysis (CMA), which is typically done by real estate agents for listing clients. Both reports are created by evaluating multiple comparable properties and calculating important factors, like price per square foot. However, an RMA is created specifically for investors to determine the investment potential of a market or property. By conducting an RMA before purchasing a property, investors can save themselves from buying an underperforming asset that loses money.

Investors typically use an RMA to make an investment decision before they purchase a property or to determine how much to charge for rent. When it’s done correctly, using the steps below, a rent analysis can provide key insight into the rental market and potential profits.

7 Steps to Conduct a Rental Market Analysis

There are seven steps to performing a detailed rental market analysis. At the end of these steps, those considering or actively investing in real estate will have a much deeper understanding of the local rental market and average rents in the area. This information will help you determine the quality of a potential property or set a strong rental price.

1. Choose the Resources You’ll Use to Research

The first step in starting your RMA is to be aware of the resources available to you that have property data you can utilize. It’s useful to establish a handful of potential resources to help you find and evaluate properties.

If you’re working with a real estate agent, they can provide access to the multiple listing service (MLS) that houses the property data for all properties currently on the market, pending, and rented. There are also many popular real estate listing websites, like Zillow and Realtor.com, that offer valuable rental property details like the square footage, lot size, and property features.

RentHop rental price comparison tool (Source: RentHop)

Comparable properties can also be found on rent-specific listing websites like Apartments.com and RentHop. Both sites offer extensive search filters so you can input details of your property and see the rent prices for similar properties in your area. RentHop also allows you to use its Price Comparison tool to research rent prices in nearby states, cities, and neighborhoods. By gathering these tools in advance, you’ll be prepared to collect a list of similar properties and conduct your RMA accurately and efficiently.

2. Develop a Spreadsheet to Organize Property Data

The next step in creating a rental market analysis is to use a spreadsheet to organize all of the data and calculations throughout the rest of the process. It may seem like a simple step, but failing to plan for the organization of your data can significantly complicate your entire process. If you try to simply list your notes and calculations on a piece of paper or digital notepad, it will quickly become overloaded and unreadable.

Instead, develop a spreadsheet with places and algorithms for your calculations. The right spreadsheet will keep your information organized and easy to read, allowing you to clearly see the numbers and information to make conclusions about potential properties. Plus, you don’t have to spend months developing the perfect spreadsheet format—you can use ours. Download the RMA spreadsheet below to easily import property data and run calculations.

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3. Gather All Information About the Subject Property

With the correct tools in hand, start tracking the necessary information about your potential rental purchase. Homebuyers and investors will pay attention to similar property factors like location, size, features, and price, but investors should also evaluate criteria like concessions offered, amenities, and days on the market.

Your subject property criteria should include:

• Address: In order to clearly show the property’s location
• Status of property: Define whether the property is on the market, in foreclosure, or the date it is expected to be available
• Number of bedrooms: Bedrooms are typically defined as a space with a door, window, and closet
• Number of bathrooms: Bathrooms with a toilet and shower or bathtub are considered full baths, and bathrooms without a shower or bathtub are listed as half-bathrooms
• Concessions offered: These are special offers or discounts made by the owner to incentivize new tenants to move in, like moving assistance or waiving the security deposit
• Building amenities: Define the amenities offered to all tenants, like a fitness center, pool, parking spots, or a playground
• Apartment amenities: Look for amenities in the units like laundry, appliances, air conditioning, or outdoor space that are available only to the tenants living in that unit
• Square footage: Note the size of the property or unit
• List date: Consider when the property was listed for sale
• Listed price: Note the price of the property when it was listed for sale and if there were any price increases or drops
• Days on market (DOM): Know how long the property has been on the market to evaluate demand and overall appeal
• Property link: Include a link to the listing for easy access

4. Evaluate the Neighborhood

Evaluating the neighborhood through rental market research is a key step of creating an RMA. It’s vital to verify that the neighborhood you’ve chosen is desirable for renters and will lead to a profitable investment. This decision is not as simple as looking at the neighborhood or asking residents if the neighborhood is “good,” since that’s subjective.

Instead, look for specific data that shows how properties in your desired neighborhood or area appreciate and attract quality renters who will respect the property and lease. Choosing a neighborhood doesn’t equate to a certain dollar amount for your rental pricing, but it does give you an overall picture of whether or not you want to purchase a property there.

Some of the most important factors when evaluating a neighborhood include:

• Access to public transportation and/or places to park
• High walkability score
• Good local private and public school ratings
• Nearby amenities and attractions, including parks, libraries, and cultural venues
• Easy access to dining and shopping
• Businesses that are open (you don’t want to buy near a deserted area unless you know it is being developed)

Things to avoid when choosing a neighborhood:

• High or increasing crime rates
• Multiple distressed or vacant properties on one street
• More than a few businesses that are permanently closed
• Noisy areas (e.g., proximity to a factory, police station, or airport)
• Streets that aren’t cared for (e.g., excessive potholes, crumbling sidewalks, and defunct streetlamps)

Listing neighborhood information (Source: Realtor.com)

Most tenants want to live in the area because it’s clean, safe, convenient to amenities, and easy to get to. You can’t change the curb appeal of a neighborhood, but you can change the curb appeal of a property. After evaluating a neighborhood based on these basic criteria, you should be able to clearly identify whether this neighborhood is a good candidate for a rental property.

5. Identify Comparable Properties

After you’re familiar with the surrounding neighborhood, it’s time to find a few comparable properties that compare to the subject property. It is best to include at least five comparable properties, including a variety of properties currently on the market and those that have recently been rented.

Generally, comparable properties must be in the same neighborhood and be similar in size, amenities, and condition. The main factors to consider when searching for comparable properties for your rent analysis include:

• Proximity to each other: In an urban area, they should be within a three-block radius. On the other hand, properties in a suburban area should be within a couple of miles, and rural areas may be even further away.
• Square footage: All properties should be within a couple of hundred square feet in size.
• Rent price: Although you may not have the final calculations for your rent price yet, find properties for rent in a similar price range that you are expecting to charge.
• Number of bedrooms: Must be the same in all comps; don’t compare a one-bedroom with a two-bedroom.
• Number of bathrooms: Should be similar, although you can compare two and 2.5 bathrooms.
• Lot size: This is an important factor for single-family homes in particular.
• Condition: Needs to fall in the same category, such as updated, original, distressed, etc.
• Amenities: Similar amenities in the unit and building; if not, then you can adjust for them.
• Days on market (DOM): If a property has been sitting on the market for over 60 days, then it may be priced too high or have some type of flaw. You can generally adjust the price down by about 5%, depending on the reason the DOM is so high.

Rental property search (Source: Zillow)

There are a few different ways to search and find property data, like working with a real estate agent who can do the rental research for you or searching popular sites like Apartments.com, Realtor.com, and Zillow. Another option is calling the phone numbers listed on “for rent” signs or online listings and talking directly to the landlord or property manager. However, you’ll still need to find interior and exterior photos to verify its condition is similar to the property you’re considering.

6. Complete Calculations

With about five to seven comparable properties identified, you’ll be able to start gathering some valuable insight into rental market trends and generate a thorough rental analysis report. The next step of the rental analysis will include calculating the prices based on property features and amenities, which will help you derive an average rental rate and rent projection.

In order to identify those details, you’ll need to do some further digging into the comparable data by calculating the price per square foot, price adjustments for amenities, and potential vacancy and occupancy rates. Keep in mind that by using our property data spreadsheet, these calculations will be done automatically.

Pre-adjusted Price per Square Foot

The first part of your rental rate analysis should be calculating the price per square foot. This varies widely in different parts of the country. For instance, renters in San Francisco pay an average of $4.59 per square foot, while Milwaukee renters pay an average of $1.60 per square foot.

The price per square foot also depends on the amenities the building has and its condition. A modern unit that has been upgraded in a building with a valet and a pool will have a higher price per square foot than an original, non-updated unit of the same size in a building with self-parking and no pool.

The formula to calculate price per square foot is:

After you find out the price per square foot of the comp properties, average them together to get the average price per square foot. For example, if the prices per square foot of three comps are $2.50, $3.00, and $2.80, add them up and divide by 3 to get the average price per square foot ($2.50 + $3.00 + $2.80 = $8.30, so $8.30 / 3 = $2.77). $2.77 is your average price per square foot for the rental area.

You’ll be able to use this figure to easily calculate the potential rent price of any potential rental investments. However, don’t forget to further adjust this calculation for occupancy rates and amenities using the next two steps.

Price for Amenities & Adjust as Needed

When an appraiser determines the fair market value of a house, they adjust it for property upgrades and amenities. Similarly, an important factor in any rent market analysis is adjusting the average rental price per square foot for amenities.

There are generally two types of amenities:

• Community or onsite amenities: These amenities benefit everyone living in the building (e.g., a parking lot, billiards room, or spa).
• Unit amenities: These are solely for the renters in an individual unit (e.g., balcony, washer and dryer, or upgraded appliances).

Amenities don’t usually have a specific price correlation, but they do impact the overall rental price. They vary greatly by city and by neighborhood. In New York City, amenities that increase the overall rent price of a unit are having a doorman, a pet-friendly building, and an onsite fitness center. In other parts of the country, features like outdoor spaces, valet parking, and an onsite spa tend to affect the rental price more.

Make sure to also include the potential lack of amenities in your apartment rental market analysis. For example, a building with a lack of adequate parking or no security may rent for less than a similar building that offers 24/7 security and dedicated parking spots. In addition, a rental unit in a condo association or homeowners association (HOA) will generally provide amenities and increase your dues, which should be reflected in your rent analysis.

Occupancy & Vacancy Rates

It’s extremely important to know the vacancy and occupancy rates of a building or area, since these can massively impact your profits. Knowing these rates doesn’t necessarily tell you what rental price to charge, but it will show you an area to avoid or an area that is a great candidate for an investment property. It might also help you increase or decrease your expectations by further adjusting the average rent per square foot.

The occupancy rate is the percentage of the year a unit or area is rented, and the vacancy rate is the percentage of the year it is vacant. Therefore, the occupancy rate and vacancy rate should have a sum equal to 100%. If the vacancy rate is 10%, then you know that the occupancy rate is 90%.

The definition of a high vacancy rate depends on the standards for your area. For example, rural areas tend to have higher vacancy rates than cities and suburbs with larger populations. However, in general, a vacancy rate of over 11% is considered high.

You can generally find occupancy and vacancy rates in three ways:

• The U.S. census website
• A local real estate agent
• A local property management company

If occupancy rates are higher than 11%, you might want to decrease the average rent for the area. Conversely, if it’s a hot market with almost no vacancy rates, you might be able to charge slightly above average.

7. Analyze Prices of Properties for Sale

After taking all the steps to create a detailed rental market analysis, you’ll be well-versed in the local rental market and average prices. This is key for the process of evaluating potential rentals and setting rent prices, but many investors don’t realize how valuable the data from their RMA can be for the process of choosing and purchasing an investment property.

When evaluating potential rental properties, you need to consider housing prices, inventory, and supply. The reality is that not every home for sale is a good candidate for a rental property. If the price of a home is too high for you to profit on a rent payment, then it will simply not be a proper investment.

On the other hand, if there are plenty of homes available at a low enough price in one neighborhood, this can also be a red flag. For instance, if there are 10 similar rentals available on the same block, you may not have enough demand (renters) to meet the supply of inventory (apartments). This means that your property may sit on the rental market and you may end up being cash flow negative due to your carrying costs and lack of rental income.

Knowing the average rental rate per square foot is key during the house hunting process. You can easily check available properties and find out if they can be cash flow positive given your down payment and monthly carrying costs (which include your mortgage payment, taxes, and insurance).

For example, you may calculate the total monthly costs of three available houses for sale are $1,500, $2,000, and $2,500 per month. If the average rent per square foot is $2 for the area, you might find that the rent you can charge for each is $1,500, $1,900, and $3,000, respectively.

From this quick analysis, you’ll see that the highest-priced house will provide the highest level of cash flow. Even though the property costs more, it will end up generating a stronger return.

Bottom Line

A rental market analysis is a valuable tool for real estate investors. It helps them get specific answers to the question, “How is the rental market?” By using the right resources, evaluating comparable properties, and calculating important rental data, you’ll be able to choose a great investment property and set a price that attracts tenants.