By Michael Lapsley: President of Rentometer, Inc.
Topic: Using Percentiles to help you evaluate and set the rent for your rental
Rentometer provides a variety of statistics that can help you evaluate your rental market and, in turn, help you set the rent for your rental unit. By understanding the rental rates, you can also quickly evaluate a possible rental purchase or how much you can and should spend on renovating your property and still cash flow. The most commonly referenced statistics are the "average rent" and the "median rent." The average rent is somewhat self-explanatory and is the sum of all rents in the area divided by the number of samples. The median rent may not be as clear but is relatively straight forward – the median rent is the middle value in the list of rents (in ascending order), and it means that half the rents are above that value and half the rents are below that value.
You need to be armed with a little bit of knowledge about your rental property to understand where you stand on the rental scale.
A quick assessment of your property based on location square footage amenities building type (house/duplex/apartment) age of the building These factors all play into whether it is considered an average, below-average, or above-average rental property.
You can consider using not only the rental amounts based on your assessment but also percentiles.
A "percentile" is a statistic that is usually overlooked and underutilized. Percentiles seem more complicated but are quite simple and can help assess rental markets and, in particular, your rental. So what is a percentile? A percentile is a percentage value between 1 and 100 that represents a threshold. All the rents are above or below that value. Below are examples of percentiles and what they represent:
- 25th Percentile: 25% of rents are below, and 75% are above this threshold. The 25th percentile represents the lower end of prices in the area.
- 50th Percentile: 50% of the rents are below, and 50% are above this threshold. The 50th percentile represents the middle of the prices in the area.
- 75th Percentile: 75% of the rents are below, and 25% are above this threshold. The 75th percentile represents the higher end of prices in the area.
Percentiles can come in handy in a variety of ways when assessing a rental market. To help high-light the examples, we are using a Rentometer QuickView report for 641 West Palo Alto Place, Tucson, AZ.
Example 1: Jim has a vacancy at 641 West Palo Alto Place. The unit is 2 beds, 1.5 baths. Jim thinks his unit is in the top end of the market because he's put a lot of work into the unit, the unit is in a great location, and it's a decent size for that floor plan. The average rent for that area is $1,271, but Jim would be better starting near or above the 75th percentile of $1,501 because of his rental quality. That's a difference of $230/mo and $2,760/yr!
Example 2: Sarah is looking at an investment property near 641 West Palo Alto Place with a purchase price of $115,000. The unit is rentable, but with some work, the unit would be more valuable and command a higher rent more in line with the market average. To estimate a reasonable renovation budget, Sarah uses the median rent of $1,298 and applies the 1% rule to calculate that her total all-in cost shouldn't exceed $130,000. A reasonable estimate for the renovation budget would be about $15,000, which is the all-in budget of $130,000 less than the $115,000 purchase price.
Example 3: Pat has been presented with an opportunity to purchase an investment property near 641 West Palo Alto Place. The information provided to Pat states that the unit has been fully renovated, has rent potential of $1,800/mo, and is listed at $175,000. Pat is going to investigate further but is likely to pass on the deal because the 75th percentile rent in that area is $1,501, which would support a more realistic purchase price of $140,000 to $150,000.
As you can see from these three examples, using Rentometer to find your property's rental rate based on percentiles can help you determine a possible opportunity, renovations, or set the proper rent for your units. By using rental rates and looking at percentiles, you can be sure to price your rentals right.
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