Trying to predict what should be the rent of a new property you are purchasing is super essential for buy & hold investors.
Not only that it's a go/no-go for a deal from a returns standpoint, but also it will help you understand how much you should renovate the property: there is a cap on how much rent you can charge, and over-renovating will not bring more rent. The more accurate we can predict rent, the better deals and decisions we will make.
This article will explore various ways to get a rent range and plan accordingly.
Before we dive deep, here is some housekeeping:
Rent will probably increase with time, but as buy & hold investors, we need the property to cash flow as soon as we stabilize it (aka after purchase and renovations).
Rents can vary by the condition of the property significantly. When buying a fixer-upper, make sure that you either budget for fixes to charge the rent you aim for or aim for a lower rent.
And now, let's dive deep.
#1: The 1/3 rule
The 1/3 rule means that people will usually not spend more than 1/3 of their income on rent. Every tenant feels comfortable spending different amounts on rent, but this rule can help you understand if you are in or out of range.
To determine a tenant's income in an area, we use websites like Justicemap.org, bestplaces.com, or niche.com; type in the zip code and tract, and see median income.
#2: Look around
A tenant will likely not only see your unit in an area. They have options, and these options cater to the same tenant pool.
Soon after you purchase and renovate the property, you will be one of many in the area. So, use websites like apartments.com and zillow.com to discover what other investors charge for rent.
Type your property address and look at "For Rent" properties around.
While the price that the listing is published for doesn't mean that this is the rent that will be charged, we can still learn a lot from it:
Look at the pictures to understand what kind of renovation can justify what kind of rent.
See how long the listing is published for this price point.
Look at the price history to know the difference between the published price and the rented price.
The better comps you can find, the more accurate you will be able to be - try to compare your unit to the same sqft, layout, room dimensions, etc.
#3: Websites that predict rent
There are a handful of sites that can help you predict rent. They are doing a great job in getting you the range of rent you can expect in your area.
Note that these websites can also make mistakes as it is automatically generated. Even the smallest radius can catch properties that are not comparable to yours - different neighborhood, sqft, etc.
Rentometer is a website for rent estimations only. On the paid version, you can control the search radius and get a summary of rent based on the number of bedrooms, etc.
Source: rentometer.com.
Bigger pockets offer five free rent estimators before you need to upgrade for pro. The results are very detailed with confidence, comparables, and more.
Source: BiggerPockets rent estimator.
Click on start for free on this website and type in the address. You will get a rent estimate, comparables with similarity percentage, and more.
Source: rentcast.com rent estimator.
#4: Ask a local
Property managers and leasing agents are in touch with the tenants and understand what rents can work in an area and what cannot.
Reach out to a leasing agent, a property manager, or fellow investors that work in the area and ask!
If you don't know who to ask, look for "for rent" listings around your area and call them.
#5: Use Section 8 data
For those who don't know, section 8 is a program assisting people in need with rent payments.
They publish on their website how much rent they are willing to pay for a unit in your area in this layout. As section 8 income is more stable, it is also a bit lower than what you can charge in the market. Therefore, section 8 can be a good marker for the minimum charge you can expect.
Here is an example for Buffalo, NY:
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