French writer Voltaire is famous for stating, "It is said that the present is pregnant with the future." Is the future of a rental property—or lack thereof—as easy to predict as it seems? Looking into the future is typically seen as a tricky business. However, it turns out that Voltaire may have made an excellent real estate investor—especially if he used a rental analysis. In the Richmond area, a rental analysis can be a powerful tool to help predict the potential of an investment. Here are some factors a rental analysis evaluates.
1. The Neighborhood
A property's placement in the neighborhood is often more important than the condition of the house itself. An owner can control the improvement of a home. Dictating improvements to an entire community is far from probable—even for the most optimistic owner.
A neighborhood that's a good investment is going to have access to conveniences that make it attractive to renters. These include public transportation, parks, and libraries. When people know the place they wish to rent has free conveniences nearby, they are much more likely to commit.
For many parents, a crucial factor is the school system. It’s important for robust school systems—both private and public—to be in the immediate area. Not only do renters indirectly pay for them, but they also represent an investment in the future of your tenants’ children.
The neighborhood should also have access to businesses, grocery stores, dining, and shopping options that are open consistently.
2. Comparable Properties
The rental prices for similar properties in Richmond will tell you a lot about the profit potential for those you may be considering. The following traits are the most important when doing comps:
- Proximity to the property being analyzed: Comparable properties should sit within a few blocks or a two-to-three mile radius of each other.
- Size of the lot: The lot size should be similar, but this is more important for a single-family home.
- Square feet of the home: The square footage should be within about 150 square feet. Otherwise, you could be comparing apples to oranges.
- The condition: A comparison of the conditions of the respective buildings should reveal strong similarities. Compare new construction to new construction, and compare distressed properties to others in similar shape.
- Amenities: The amenities offered don't necessarily have to match perfectly, but they should be similar. If a unit you have your eye on has superior amenities to those in the area, it can be a strategic bonus. Too many additional perks, and it might be harder to rent for its true worth.
- Numbers of bedrooms and bathrooms: The number of bedrooms should be the same, and the number of bathrooms should have a difference of no more than ½.
3. Rental Price per Square Foot
To calculate the price per square foot of an area, you should identify three rentals with similar comps. Then, divide the cost of each by the square footage. Once you have these three quotients, you can average them. For example, if you’re doing comps in the Richmond area, and you find three properties with costs per square foot of $1.25, $1.32, and $1.27, you can add these up to get $3.84. Dividing this by three gives you an average of $1.28. The cost per square foot for a property you are checking out should be close to that amount.
4. The Rates of Occupancy and Vacancy
Renting is only successful if your investment property remains occupied. An "attractive" investment is still a dud if people aren't renting it regularly! The best way to figure out the rate of occupancy is by having a property management company investigate figures for you. Not only do they have extensive experience in performing rental analyses, but they have an advanced understanding of local markets. Another option would be to examine census data, but this could be somewhat misleading because it may be outdated. Ultimately, you’re hoping for an occupancy rate that is 89% or higher. Anything less, and this may be one "opportunity" you'd want to avoid.
The occupancy rate can't be used to pinpoint the rental price, but it can be a great sign of the value of the area as a vehicle for rental investments. Even though low occupancy is never good, sometimes, a low occupancy rate can be combated by dropping the rent. Take a look at historical data for rental rates in the area. If you notice a decrease in occupancy rates that occurred when rents went above a certain level, this amount could be a soft target for what to charge. Still, low occupancy is always a warning sign that should not be ignored.
A rental analysis provides a wealth of information that is both easy to understand and interpret. If you share Voltaire’s view of the future, reach out to Mission Realty Property Management for an expert opinion! You can get a FREE rental analysis from the professionals and save yourself the stress of investigating the market alone. Don't let your future opportunities become missed opportunities!