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How To Estimate Rental Income For Multi-Family Property

How To Estimate Rental Income For Multi-Family Property

Hi everyone, this is Todd Wheatley with Candor Realty Boston. In this video, I’m going to talk a little bit about how I estimate rents for a potential rental property, house hack, or other investment property. This is one of the most common questions we get from real estate investors, especially folks looking to purchase their first or second property is how do I have the confidence to know what my units are going to bring in for rent?

So this is definitely more of an art than a science, but the good thing is, especially in Greater Boston, there’s a lot of data available to us so we can get really accurate estimates of what your rental unit will demand. So I’ve put together are a buyer resources page on our website at candorrealtyboston.com. If you go to the Resources for Real Estate Investors section it will bring you to this page. And down below, I’ve included some links and videos that will help you at various point of your analysis and search.

  • Rentometer https://www.rentometer.com/
  • HUD Fair Market Rent (FMR) Estimate Tool https://www.huduser.gov/portal/datasets/fmr.html
  • Boston Housing Authority (BHA) Payment Standards 2021+ – https://www.bostonhousing.org/BHA/media/Documents/Leased%20Housing/SAFMRs/January-2021-Payment-Standards-All-Bedroom-Sizes-Rev-3.pdf
  • Zillow Rental Estimate – https://www.zillow.com/

  • And one of the sections I put together is rent estimation tools. So these are some of the tools that I personally use to estimate rents for myself and on behalf of clients that I’m working with. So for the sake of this example, I’m actually going to pick one of the rental properties I purchased last year in Waltham. And so we will walk through using the tools and the outputs that they send, so you can dial in your rents. The first tool I use is called Rentometer. So you can go to rentometer.com and it will bring up this search tool. I’ll go to 119 Pine Street in Waltham.

    Again, this is a duplex that I purchased last year directly from a seller for rent. So again, I’m not necessarily choosing a number. I kind of want to reverse engineer. So I just put like $1,000. Again, this is just putting a number in. I want to see kind of a summary one to four-bedroom. So I want to see what would a one-bedroom, two-bedroom, three-bedroom, and four-bedroom rent for in the area. I’ll do any bathrooms. I’ll look back, so we’ll look back for 12 months.

    I typically leave search radius at auto. You can dial this if you’re in an urban setting and want a shorter radius, you can put smaller radius. You can narrow that down here. This is a duplex and I’ll do analyze. And one thing it’ll show, it’ll start to spit out the summary. And you’ll see one-bedroom data, two-bedroom data, three-bedroom data, four-bedroom data.

    Now, one thing that’s important to know, I’m going to go to the pro report to get a little bit more detail. You want to do a little bit of backend research. You don’t just want to take this number at face value and I’ll show you why, especially in urban settings where you might be close to neighboring cities or towns. So this did a search radius of two miles and I know where this property is. I’m close to the Newton line. So if we go down to the map, you can actually see. So the subject property here is around where the O is. It’s closest to around the O or the C.

    This is Newton over here down at the bottom of the map so I know I’m pretty close to Newton. And if I actually go down to the list of properties, you’ll start to see. So this subject one is in Waltham or this comp is in Waltham, Waltham, Waltham, but then you get Newton. And then if we go to two-bedrooms, you got Newton, Waltham, Waltham, Waltham, Waltham. So you have to be careful because the Newton rents are going to be much higher. And so what I would do is I’d say, “Okay, well I know my duplex has two three-bedroom units.”

    I would look here, I’d say, “Okay, this is estimating an average of $3,000,” kind of what the ranges are, et cetera. And I’d come to out of the three-bedroom section and I would just ignore the Newton ones. So I’d say, “Okay, Waltham, this one’s 2,700. That’s Newton and this one’s 3,000.” So again, back of the envelope, I’d say I’m somewhere in the high $2,000 range.

    If you want to drill into the details, you actually can go to the property details. If there is a recent listing, you can get pictures, photos, details around the unit. But again, quick and dirty, I would say I’m somewhere in the high 2000s to $3,000 range. So if we go back to our page, the next page I would go to is the HUD Fair Market Rent Estimator tool. And what you can do is you can go into fair market rents and just type in your state and city. And again, this is going to give you what HUD is going to estimate for fair market rents, which again, you can kind of see three-bedroom. We’re in the high $2,000 range.

    Interestingly enough, it actually is reporting rents have gone down year-on-year. So this is $2,900 for 2021, $2,700 for 2022. I would challenge that based on what I’m being in the market. But again, this is just one data point that we’re using to try to dial in our range. And the good thing is so far these two data points are mostly aligned with one another from kind of $2,700 to $3,000.

    All right, so now we’ll close tools. Let me actually go back to the Resources For Real Estate Investors page. And the next one is going to be the Boston Housing Authority payment standards. So now this is what the Boston Housing Authority will pay for a voucher holder. So kind of Section 8 or other voucher programs. And what this will do is this will kind of give you a litmus test of market rates that we’ve just looked up versus Section 8 or voucher subsidized rents. And if those are close to one another or if there is a spread there.

    And so if you go to that page, it will bring up the Boston Housing Authority payment standard chart. And what we would do is squirrel down to Waltham here, all zips. And we would go to, I think this starts at studio, so bear with me while I browse back up. So we go, SRO, zero, three. Three-bedroom is actually column five. And so if we go Waltham we get $3,125.

    So the Boston Housing Authority Voucher program will actually pay up to $3,125, which is slightly higher than what we’ve seen in our other two tools, but still very close. So maybe what we would say is our range is actually somewhere from $2,700 to $3,100. However, you need to know that this includes utilities. And so this would actually come down if you were going to pass along electric, gas or any other utilities to your tenants. So we’re still kind of in that $2,700 to $3,000 range.

    And then the last place I’d like to check is Zillow. I don’t put a lot of stock in this one, but I do like to check it again, especially if there’s variance in the first couple of links or tools. I like to go to Zillow just to add another data point. I’m pretty comfortable with what we’ve seen in the first three that I would have a high degree of confidence in my rental estimate, but we’ll go to Zillow anyway. And again, we just type in the address here and we would scroll down.

    Actually, I’m going to go to public view because it knows I’m the owner. So I’ll go to public view and then you’re going to go down to … Usually it’s a little bit of the ways down. Yeah, list your home for rent. So the rent estimate here is $2,277 a month. Again, this is one of the reasons why I don’t really love the tool, especially for multi-families is they don’t always know the size of the unit, how many bedrooms are in the unit. And so sometimes this data is kind of way off as you’ve seen here.

    Like I can tell you firsthand, our units are renting for much more than this. They’re kind of in the range that we just spoke about in the last few examples. But again, this is an additional data point. You can use it if it kind of confirms what the other tools have told you. Throw it out if it seems to be an outlier. And that’s what I would do, that’s if I was running an analysis on a rental property that I was interested in buying. That’s it. It would take me about five minutes. I’d have four different tools and four different data points to dial in my range. And I would use those numbers for my analysis.

    Once I go to see the property, I can see the condition, I can see the size and that way you know if it’s an exceptionally nice unit, if it’s a little bit larger than what you think the average unit is, you’re going to be at the upper end of the range. If it’s a small all unit, if it needs some updates, you’re probably going to be at the lower end of the range. And so then you can dial in your numbers once you see the property.

    So that’s kind of a quick overview of how I use these tools. They’re here on the candorrealtyboston.com website. Again, the Resources for Real Estate Investors page. And the links are under the Rent Estimation tools. Leave a comment below or reach out to me directly if you have any questions, and have a great day. Happy investing!

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