How Are Market Rents Determined For A Multifamily Property?
In last week's article, we spent some time looking at what goes into the underwriting of a multifamily property. Today, we will dive into one of the key pieces of information that goes into the underwriting which is the current and proforma market rents on a subject property.
The effort of determining accurate market rents begins by conducting research on properties that lie within the vicinity of the subject property. It is important to carefully study the area on a street by street basis in order to ensure that the neighborhood doesn't drastically improve or get worse at the comparable property. Once ideally several properties have been identified, we can begin to create a list of similarities and differences between these properties and our subject property. These could include things like age, renovation level, floor plans available, amenities offered, who pays the bills and whether the units have washer and dryer connections. All of these items and more can factor into the rents achievable.
The final piece of data that must be collected is the actually rents that are currently being generated by the units on these properties. A quick way to get started for a rough estimation of this is to look on the website of different properties to see if pricing information is available. However, to hone in and get the most accurate information you must call the properties individually and speak with a leasing agent. It's important to ask what unit size and amenities are included with the rent quotes since apartments often have multiplied offerings. This is also an opportunity to clarify how the utility billing to the residents works and also if any concessions are currently being offered which would lower the effective rents. Although tedious, this step is crucial is you truly want to get a grasp on what the given submarket can produce in rent increases for a given apartment unit.
Analyzing The Data
Once all the data and pricing information has been gathered, it's time to use it to calculate our market rents. The first thing to look for is any trends in the pricing difference amongst properties and even their different units. For example, washer and dryer connections in a unit often command around a $50 premium when compared to one without them, but can you find evidence at one or more properties that this is actually the case. Or how about the differences in the ways the properties bill back (or don't) utilities to the tenants and its impact on the rents. This part of the analysis can certainly be subjective but it's much better to be approximately right than completely wrong.
After values have been assigned for the different property characteristics, it's time to see how these could impact rents on the subject property. Perhaps there is already opportunity to increase rents or bill back without any renovation work, but more importantly which renovation projects will produce the highest increase in income. The results of this study can then be added to the underwriting in order to calculate what both renewals (in unrenovated units) and new leases in renovated units can produce. This is why determining the market rents is really at the core of the analysis needed to successfully underwrite multifamily properties.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.