How Can I Find the Rent Rate in a Specific Market and Estimate Cash Flow?
Investing in unknown markets on your own carries more risk than investing in your immediate backyard. When you put together the right set of tools and resources, you can mitigate the risk and prepare yourself to invest in areas that may not have been on your radar but offer plenty of potential deals. How do you know if an area has the potential to cash flow for you?
Let’s explore how you can learn about market rents in unfamiliar areas and understand their cash flow potential.
Understanding market rents
As you consider a rental property purchase out of state or in a new market, it’s essential to understand current market rent rates in the new area. There are tools available to give you a good picture of the area’s real estate and rental market and equip you to make an educated decision as to whether or not you want to purchase a property.
1) Use Rentometer to understand the averages and potential
With Rentometer, you can enter any property address and receive a Quickview of rents in the immediate area around the property. Apply one or more of the available filters to narrow down the rental pool by the number of bedrooms, bathrooms, and building type. Rentometer’s search will retrieve details for nearby rental listings posted within the last three months. You’ll receive several results that include average rent rate, rates for the lowest-priced 25%, and rates charged by the upper 75%. This information will give you a good range of numbers to start with when considering the purchase price and cash flow potential.
Because Rentometer pulls current rental listings from other online rental listing websites, you don’t need to visit those sites and do double duty.
2) Use Rent Calculators on Zillow, Trulia, and HotPads
Zillow’s rental calculator will show you listings from the service’s subscribed property managers and owners. Zillow rent estimates originally came from a company called Postlets. Zillow purchased Postlets and subsequently merged with Trulia and HotPads. Now a landlord who lists properties on Zillow will have the identical listings shown on all the sites. This is a useful tool, but remember that it’s not open-source. It only shows listings from paid subscribers, so their rent rates will be current, but you won’t know about how those rates compare to other rents in the area where the landlords are not subscribers.
3) See GoSection8.com for useful information
The GoSection8.com rental calculator conducts searches on Section 8 housing. It compares Section 8 properties in a given area, offering information about average, high, and low rents within that pool. If you consider purchasing a property in a low-income area, these Section 8 housing rates can be useful.
Depending on your profile as an investor and what you consider reasonable for cash flow, a list of averages derived from these tools can give you a good idea of what to expect for rent in any specific location.
Use the average rent amount to calculate cash flow, or actual numbers when available. Estimated numbers can conceal a wide range of variability but still serve a starting point for research if you don’t have hard numbers to plug in.
Good rules of thumb for expenses
Unless you pay for the property in full with cash, you will have a mortgage payment as the first line item to subtract from rental income. You will also need to estimate and account for taxes, insurance, a vacancy allowance, a repair fund, property management fees, and cap rate if you are looking to purchase an apartment building.
Here are accepted industry estimates to use when actual numbers aren’t available:
1) Vacancy - 5%
2) Repairs - 5-10%
4) Property Management - 6-12%
5) Utilities - 5% (or contact the local utility company for their system-wide average per-person cost)
After you’ve looked at the estimates for rent and cash flow, you need to decide if the property is worth pursuing further. One good practice is to reach out to the listing real estate agent or find a local real estate agent who’s willing to help you with specifics.
It is always best to work with actual numbers for expenses and rents to dial in your purchase decision. You can then compare your initial estimates and averages, with real data. If the actual numbers make sense, and you factor in other possible costs like initial repairs to make before renting the property – and the property still meets your cash flow requirements, this would be a sound purchase.
The only constant is change
Real estate costs, rents, and cash flow are always changing. The markets flip between favoring buyers and sellers in terms of available inventory and pricing. No matter which part of the cycle you’re in at the time you want to purchase, it’s important to commit to due diligence and chasing down accurate numbers whenever possible.
Rents will fluctuate in each part of the real estate cycle as well. When purchase prices are high, most renters will not consider buying a house. Rental housing demand will remain strong, as will rents. On the other hand, during a buyer’s market, when housing prices are lower, rents will be lower too.
Your actual cash flow can also fluctuate due to factors completely unrelated to the market. If you need to invest in major repairs, like window replacement, for example, you’ll have larger expenses to subtract from monthly income. Because repair expenses do pop up unexpectedly, the number may exceed your 5% estimate in any given month. The best way to ensure more consistent cash flow is investing money in the property upfront and spring for quality items that will hold up over time, especially if your property manager and tenants provide reasonable and regular care for the property.
If a real estate agent is listing the property, you’ll need to ask the agent for actual expense numbers from the landlord. If the property is for sale by owner, the owner should supply you with a detailed profit and loss statement for both the current year to date and the past year, along with a rent roll and a current lease. This information will give you a better idea of how the current owner or landlord manages the property and where you might see room for improvement.
In the initial research stages, estimated numbers are good enough to guide you as you explore an area on your own and decide if the new market holds your potential. But before you make an offer on a rental property, be sure to look at actual numbers.