How to Conduct a Market Analysis for Your Rental Property
Renters Warehouse Blog
Every landlord’s goal is to purchase a property that will generate a profit. But how can you take steps to ensure that the property you end up with is one that’ll allow you to generate returns that are in line with your investment strategy goals?
One important step that shouldn’t be overlooked is conducting market analysis. Market analysis involves taking a good look at the housing market, including the local housing market, before you make your purchase. This allows you to assess whether a potential property is a good investment opportunity, or whether you may be better off putting your money elsewhere.
Put your money to work for you. Here are some steps that you can take to conduct market analysis if you’re thinking of buying a rental property.
Please note that while this article is intended to raise awareness and highlight the importance of market research, it isn’t an exhaustive list of everything that you should look for before investing in real estate. As always, it’s important to conduct your own due diligence before investing.
What Is Market Analysis?
Market analysis involves looking at factors including real estate data and local market data for the rental you’re considering investing in. The goal is to help you make a wise decision when investing in rental property.
Doing market analysis helps rental property owners and landlords do the following:
Make data-driven decisions by providing insights into local property market conditions, trends, and renter demands.
Set the right rental rates. Not too high to scare off potential tenants and not too low to leave money on the table.
Guide you toward investment options that offer cash flow opportunities or even appreciation long-term, helping you make investments that pay off in the long run.
And helping you to spot certain potential risks, like oversupply in the rental market or economic downturns.
Six Essential Steps For Successful Market Analysis
Step One: Set Your Objectives
Start by identifying what you want to achieve with your property investment. Are you seeking steady rental income, long-term property appreciation, or a combination of both? Your objectives will influence your market analysis approach.
For example, if you prioritize cash flow, you’ll focus on rental income potential and expenses. If you lean toward long-term appreciation, you’ll examine market trends and growth potential. Be specific about your goals, such as targeting a certain ROI percentage, achieving a particular monthly income level, or holding the property for a predetermined period.
Step Two: Find Reliable Sources
Using unreliable sources in your market research can lead to costly mistakes, such as overpricing rental rates or investing in declining markets. Stick to reputable sources that have a track record of providing accurate data.
A great example of a reliable (and free) source is the U.S. Census Bureau, which offers a wealth of demographic and housing information. Their data can help you understand population trends, household sizes, and income levels in specific areas, all of which are crucial for market analysis. You’ll also want to visit the Renters Warehouse Research Center, where you can find accurate data on different markets across the U.S.
Real estate industry reports from organizations, such as Redfin, can also be valuable. Industry sources offer different data on things like property listings, historical sales prices, and rental trends, enabling you to gauge market conditions more accurately.
Your local government offices or websites, such as county assessor offices or city planning departments, are also a treasure trove of resources. They often provide essential data on property taxes, zoning regulations, and building permits, which can help you to gain insight into the local housing market.
Step Three: Study the Local Market Trends
Rental demand greatly depends on population trends, demographics, and the job market. Investors should look at the overall economic picture of a target location. Research the following when looking into a market:
Economic Growth: Study local and national economic trends that can influence job opportunities and income levels in the area. Also, monitor any planned or ongoing economic development projects that can impact population growth and rental demand. Note that looking for areas with a variety of industries can also help to lessen risk from an economic perspective. If one industry were to experience a downturn, the area would be less impacted than if the entire economy were centered around just one industry.
Employment Opportunities: Consider the job market and employment opportunities. Areas with stable employment and job growth tend to have higher rental demand.
Population Trends: Look at population growth or decline in your target area to help predict future rental demand.
Rental Demand: Analyze whether there’s a consistent demand for rental properties in the area and whether it’s increasing or decreasing.
Vacancy Rates: Check the vacancy rates to gauge the level of competition in the area. High vacancy rates may indicate a surplus of rental properties.
Read more about Scouting Out New Markets - What to Look for, What to Avoid.
Step Four: Look Into the Neighborhood
A rental’s location and neighborhood type can profoundly influence rental demand, property appreciation, and the overall tenant experience. Don’t ignore the importance of thoroughly researching the neighborhood where the potential rental unit is located, as it gives you insight into factors that can affect the success of your rental property.
Here are some examples of things a good neighborhood may have:
Thriving Job Opportunities Nearby: Seek neighborhoods where people have access to excellent job prospects.
Safety: Tenants want peace of mind when they’re at home, so look for areas with low crime rates and those with a reputation for being safe.
Schools: If you rent out single-family homes and want to attract families, find neighborhoods with good nearby schools. You can use the Zillow® Search by School feature to find listings that fall under certain school districts.
Access to Amenities: Easy access to parks, shopping, and other amenities can be another good sign of a developed area.
Growing Communities: Areas on the upswing tend to bring in more renters and boost property values over time.
Low Vacancy Rates: Low vacancy rates tell you the neighborhood is in demand, and you’ll most likely have an easier time finding renters for your property.
Steady Market: Consider looking for neighborhoods where property values and rent prices have seen steady growth over time.
Convenient Transportation: Proximity to highways and transport hubs makes life simpler for tenants who commute.
When assessing a potential property, you’ll also want to consider:
Taxes: High property taxes can be a deterrent for some investors. Be sure to factor in the cost of taxes when running the numbers on your investment.
Legislation: Local rental laws and regulations, such as rent control ceilings or strict eviction laws, may affect your earning potential. Be sure to learn about local legislation to ensure you’re clear on what to expect.
Ever wondered about what tenants look for in a rental home? Download your FREE guide now: What Tenants Really Want - A Guide for New Property Investors.
Step Five: Learn About the Competition
One helpful step is to compare data on similar properties in your target area. This can help you to gain insight into what you may be able to expect when renting out a property in the area.
Begin by identifying rentals nearby that are similar to yours in terms of size, location, and amenities. These are your “comparable properties.” Consider the number of bedrooms and bathrooms, square footage, and proximity to your property.
Other factors to look into are:
Property Types and Features: Identify the types of properties available for rent in your target area (e.g., apartments, single-family homes, condos). Examine the features and amenities they offer. Are they equipped with modern appliances, updated kitchens, or additional parking spaces? See how these features impact the rental rates and tenant appeal. Typically, you’ll want to have amenities and features that are on par with what the neighborhood has in order to attract tenants more easily while charging a similar rent.
Pricing Strategies: Analyze how competitors price their rentals and if they offer unique incentives. This will give you a benchmark for setting your rental rate. Take note of price variations based on factors like property condition, included utilities, or lease terms.
Marketing Strategies: Find out how your competitors are marketing their rentals. Are they on social media? Do they do letter drops or give out flyers? Do they take out ads in the local paper? Examine the quality of competitors’ property listings, visual presentations, and language that they’re using. Are they investing in professional photography, virtual tours, or compelling descriptions? This can give you an idea of what works locally and helps guide your own strategy.
Step Six: Property Price and Income Analysis
Running the numbers is critical for helping to ensure that you’re not overpaying for a rental property. It also protects you from making a bad investment. During this step, diligent investors make sure that the unit has the potential to generate positive cash flow and a favorable return on investment (ROI).
When evaluating a property’s purchase price, you want to ensure it fits your budget and aligns with your investment goals. If the property is significantly more expensive than comparable properties with similar features, location, and amenities, it may be overpriced. Another factor is the property’s historical performance and rental income. If you have struggled with extended vacancies or poor cash flow, it might indicate that the rent is priced too high.
Consider contacting local real estate agents or property appraisers who can offer insights into whether the asking price aligns with the current market dynamics. They can provide a professional opinion on whether a property is reasonably priced based on local conditions.
To ensure that the unit has the potential to both generate positive cash flow and a favorable return on investment (ROI), here are two important numbers you’ll want to run before you invest:
1. Cash Flow Analysis
Monthly Rental Income: Calculate your expected monthly rental income based on the rental rate you’ve set or plan to set. Account for seasonal variations or potential vacancies.
Operating Expenses: List all anticipated operating expenses, including property taxes, insurance, property management fees, maintenance, repairs, and utilities.
Vacancy Allowance: Set aside a portion of your rental income for potential vacancies. Industry standards typically allocate around 3-8%.
Capital Expenditures (CapEx): Budget for long-term capital expenses such as roof replacement, HVAC systems, and major renovations.
Property Management Fees: If you use a property management company, account for their fees as a percentage of rental income. In fact, even if you’re planning to oversee the property yourself, it’s a good idea to factor in the cost of management. This way, if you change your mind down the road, you’ll have already factored this into your budget.
Cash Flow Calculation: Subtract all operating expenses from your rental income to calculate your monthly cash flow. A positive number indicates positive cash flow.
2. ROI Analysis
Initial Investment: Calculate the total amount you’ve invested in the property, including the down payment, closing costs, and any renovation or improvement expenses.
Annual Cash Flow: Multiply your projected monthly cash flow by 12 to determine your annual cash flow.
Annual Appreciation: Estimate the property’s annual appreciation rate based on historical trends or market projections.
Tax Benefits: Consider tax benefits such as depreciation, mortgage interest deductions, and property tax deductions that can positively impact your ROI.
Return on Investment (ROI) Calculation: Divide your annual cash flow and potential appreciation by your initial investment to calculate your ROI as a percentage. A higher ROI is generally more favorable.
Conducting due diligence is never a bad thing, especially in real estate investing. When done correctly, it can help you to identify good opportunities, helping you to take steps to ensure that you’ll be getting the returns that you’re looking for on your investment. Market analysis isn’t just about today; it’s also about setting the stage for the future, so be sure to do your research before you commit.
Be sure to take a look at the Renters Warehouse Research Center to discover data on your local housing market. This includes home price performance, employment trends, and more. Get the data that you need to make important investment decisions.
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