The Art and Science of Rent Projections📈

When I was a multifamily broker, I noticed that the buyers who routinely came in with low offers were also the ones who did minimal rent research. It’s competitive out there, and annualizing the current rent roll just doesn’t cut it anymore. Investors need to fully understand a property’s rental income potential in order to avoid missing out on deals.

Determining the market rent for each apartment unit is both an art and a science. A variety of factors can influence rent levels, from the views offered by certain units to the presence of amenities and recent renovations. Understanding these variables—and how they compare to nearby properties—is essential for projecting the potential rent income of an asset. In this newsletter, we’ll explore the key considerations that help investors underwrite accurate potential rents for their properties.

The age and quality of the renovations

I renovate every property, so the only rent info I’m looking for is for renovated apartments. Keep in mind that not all renovations are the same. Preferences on cabinet wood tones, flooring types, and paint choices are ever-changing. A freshly renovated 2BR apartment will command a premium in rent over a nearby comp that was renovated a decade ago.

When projecting rents for The Morada, our best comparable was a nearby building that had renovated 2BRs renting for $1,489. Those renovations are 10 years old, though, and in practice, we have found we can push our rents higher because of our more modern colors and material selections. 2BRs at the Morada are currently netting $1,530/mo.

Tracking the rent plus all utilities and fees

Accurately projecting rents requires understanding exactly what tenants are paying “all in” at comparable properties. I want to know the base rent, utility costs, and fees that are paid each month. A quick way to get this information is to call each rent comparable and ask directly. I inquire about the rent (it often differs from the website), the monthly fees and the expected monthly cost of each utility. Don’t forget to ask if there are any rent specials (read: concessions), ongoing as well.

Vintage

As I mentioned in my previous newsletter (A History of Multifamily Construction), the building’s construction era will affect its desirability for rent. Build quality, HVAC type, and floor plan layouts are some of the parameters that have changed through the years. A building can only serve as a rent comp if it’s a building of a similar era. An apartment from the 2000s with forced air will have much higher rent than a comparably finished 1980s apartment with a wall A/C unit.

Amenities

Tenants perceive properties with amenities as offering a better quality of life, which justifies higher rent prices. It goes without saying that a fully amenitized building can’t serve as a rent comp to a property with no amenities. Amenities that make the most impact on rents include in-unit laundry, pools, fitness centers, and community spaces.

Views & tiered pricing

Buildings with scenic views, such as city skylines, waterfronts, parks, or mountains, necessitate “tiered pricing.” Tenants are willing to pay a premium for the aesthetic and emotional value of these views, and the investor should bifurcate the rent roll between apartments with views and those without. In a high-rise, this translates to asking higher prices for the units on the higher floors. For a building on a lake or river, the water-facing apartments would garner a premium.

Secret shopping

If you really want to dial in your market rent knowledge, it’s time to secret shop the competition. Secret shopping involves posing as a potential renter and touring comparable rental properties in the area. By visiting competing properties, I can personally assess the floor plan, square footage, condition, and renovation quality of those apartments. Being able to gauge the level of customer service the competition offers is also helpful.

Final thoughts

Projecting accurate rents as part of your underwriting is a nuanced process that requires a deep dive into your local apartment market. Rent comps are only useful if the property has a similar condition, vintage, and set of amenities. By conducting thorough research, finding the right comps, and doing a little secret shopping, you can fine-tune your rent projections to be as dialed in as possible.

-Ben Michel

Ben Michel is the founder of Ridgeview Property Group, an investment firm specializing in acquiring multifamily real estate. Register Here to be notified of available investment opportunities.