The basis for determining whether or not a property will be a good fit for an investment opportunity starts with understanding rental rates for traditional, residential rentals in a given area.
If your math sucks, then so does your investment. Simple as that. While not super sexy, understanding how to properly assess rental property investments with the right calculations and tools is critical.
If you don’t crunch the numbers and factor in every aspect of the costs and potential gains, you may be setting yourself up for a rude awakening and a potential loss of your money.
Take a look at ALL the numbers.
Sales numbers, Rental Rates, & Short Term Rental Annual Revenue.
So why do we look at all three? Well, this actually was based on our conditioning doing wholesale and fix and flip deals. you might think that might not be relevant if you are only doing Short term rentals, however, the more you understand the perspective of the homeowner or investor, the better.
Investors need to make sure the numbers work for their investment properties, and the more you can speak their language the more you can gain their trust. You will have to make sure you understand their goals, even as a co-host, in order to make sure it makes business sense for them to start in the short-term rental journey. Also, the ability to understand how this works can open up the channels of marketing for where you can source deals from.
Rental numbers also make an impact here. Not only will this help identify an opportunity, but you can also make sure this makes sense for you as an investor if you are wanting to arbitrage or purchase. STRs need to be at least double the rent rate… 3x-4x is a home run.
As a purchase, we always look at rental rates as a contingency, and also as a baseline. Cap rates for purchases need to meet our threshold and risk tolerance. Keep in mind that short-term rentals are a niche investment type and not a traditional path, so we use traditional standards as a primary, and short-term rentals become the icing on the cake.
What Are Comparables?
Comparables (comps) are used in valuations where a recently sold asset is used to determine the value of a similar asset. Comparables, often used in real estate to find the fair value of a home, are a list of recent asset sales that reflect the characteristics of the asset an owner is looking to sell. However, the list of sales is generally limited to within the last year.
What to consider when searching for real estate comps.
Aim to find at least three similar homes that meet the following criteria:
- Location: Limit your search to a quarter to half-mile from your home.
- Time frame: Only include homes that have sold within the past three to six months — or less if your market is changing quickly.
- Size: Try to stay within about 300 square feet of your home’s size.
- Bedrooms/bathrooms: Include homes with the same number of bedrooms and bathrooms as yours.
- Condition of the home: Factor in things like recent renovations, updated interiors, or outdated features.
- Age of home: Homes built around the same time as yours will be the most accurate comps because major systems like roofs, HVAC, and plumbing should be in similar conditions.
- Nearby features: Find homes that align with yours in terms of walkability, shopping/retail, waterfront proximity, views, public transportation access, and school ratings.
- Price per square foot: Real estate agents use price per square foot to identify comparables. Divide the sale price of a home by its square footage, then compare that number to your own desired price per square foot.
Tips when looking for the best real estate comps
Unless you live in a subdivision where a home builder used similar finishes, layouts, and materials in all of the homes, no two housing comps in your neighborhood are exactly alike — and even when homes are very similar, no comp is perfect.
So how do you identify the best comps? Stay as unbiased as possible. Try to set aside your emotional connection to your home and focus on the facts.
Pay attention to the type of home
If your home is a single-family home, don’t compare to townhouses or condos. If you’re pricing a condo to sell, don’t compare it to anything but other condos.
Look closely at photos
Carefully scan the listing’s pictures. Does the home have finishes similar to yours? Look closely at things like appliances, fixtures, and flooring. Even seemingly small discrepancies (like stainless steel appliances versus older white appliances) can add up.
Read the listing description
In addition to looking at the pictures, you should always read the listing description. Not every improvement or upgrade is visible in pictures. For example, a recently sold home could have a new roof that would make its value higher than yours, and you wouldn’t know just by looking at listing photos.
Scan the area
Make sure you understand the nuances of a home’s location. Is it on a cul-de-sac instead of a busy road? Is it in a desirable school district? Is it near a bus or train line?
Number of Comps
Having more than one comparable property helps value a subject property. Three to four comparables are often sufficient to determine the value of the subject property, for the purchase price, rental, and STR revenue.