How to Perform Rental Comps in Multifamily Real Estate

In the realm of multifamily real estate investments, comprehending rental comps is paramount. This vital metric empowers investors to discern the potential rental income a property can generate, playing a crucial role in evaluating a market and ensuring brokers’ claims align with reality.

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Key Factors in Rental Comps

Gino Barbaro, a co-founder of Jake and Gino, emphasizes four crucial factors to consider when performing rental comps:

1. Age: It’s crucial to compare properties of similar age, ideally within a plus or minus 10-year range. A 1970s property with substantial capital expenditure needs shouldn’t be compared to a newer 2003 build, as the rental potential would significantly differ.
2. Size: The size of the property matters. When comparing, aim for properties within plus or minus 20% of the unit count. Larger properties often attract institutional investors and command higher prices, making them unsuitable comps for smaller properties.
3. Amenities: Properties with similar amenities should be compared. Central air conditioning, pools, fitness centers, and in-unit washer/dryer significantly impact rental rates. Understanding the desirability of specific amenities in a particular market is key.
4. Location: Properties in close proximity should be compared. However, the definition of “close” varies depending on the market. Dense urban areas might necessitate staying within a few blocks, whereas suburban or rural areas allow for a wider radius. Median income is a critical factor to consider when evaluating location.
5. Unit Mix and Size: Beyond the overall property size, it’s essential to consider the unit mix (studio, one-bedroom, two-bedroom, etc.) and the size of each unit. A one-bedroom apartment with 400 square feet shouldn’t be compared to a 700-square-foot one-bedroom, as the latter would likely command a higher rent.

Importance of Median Income

Median income serves as a crucial indicator when performing rental comps. Understanding the median income of an area helps gauge residents’ ability to afford specific rental rates. Comparing properties in areas with similar median incomes provides a more accurate assessment of rental potential.

Asking the Right Questions

As a passive investor, it’s crucial to be proactive and ask the right questions. Don’t hesitate to inquire about the broker’s rental growth assumptions and how they arrived at their numbers. Understanding the factors behind the rental projections will help you make informed investment decisions.

The Jake and Gino Approach

Jake and Gino, through their Passive Investor Pro program, emphasize empowering passive investors. They equip individuals with the skills and knowledge to underwrite deals like active investors. This includes a deep understanding of rental comps and other crucial aspects of multifamily real estate investing.

Conclusion

Mastering the art of rental comps is pivotal for any multifamily real estate investor. By carefully considering the age, size, amenities, location, and unit mix of comparable properties, investors can make informed decisions and avoid costly mistakes. Remember, conducting thorough due diligence and asking the right questions are crucial steps in achieving success in multifamily investing.