Download (direct link):
Making Sense of the Rents
Once you’ve collected at least a dozen rental quotes, create a table similar to this one:
AVERAGE RENTAL VALUES
SQUARE MONTHLY NO. OF PRICE PER
ADDRESS TYPE FEET RENT BED/BATH SQUARE FOOT AVERAGES
755 Lee Ave., Unit 3 Apt. 875 $750 2/1 $10.29 —
10 Atlantic Ave., Apt. 750 $700 2/1 $11.20 Avg. $725,
Apt 1A 2 BR Apt.
120 Enfield Rd., #6B Apt. 1,025 $925 3/1 $10.38 —
5 Glenwood Ct., 3D Apt. 925 $875 3/1 $11.35 Avg. $900, 3 BR Apt.
1201 5th St. House 1,100 $950 2/2 $10.36 —
1450 5th St. House 1,500 $1,200 2/2 $9.60 Avg. $1,075, 2 BR House
22 4th Ave. House 1,850 $1,350 3/3 $8.76 —
Step 5: Get Richer While You Sleep 207
Residential rental values depend on a lot of factors that aren’t shown in the preceding table. But mostly they’re about location, number of bedrooms, and square footage. And since all of the properties you’re looking at are in the same general area, getting an average rental value for a dozen properties should give you a good yardstick that you can use to quickly estimate the rent you might receive on any property you buy.
Even though I listed only 7 properties in this table (and you really should have 12), it’s apparent that the average annual rental value per square foot for an apartment in this neighborhood is $10.25. A 2/1 is likely to rent for somewhere around $725. And if it has a third bedroom, you might expect $900.
RENTAL RESOURCES ON THE WEB
The best way to get a handle on your local rental market is to check out "for rent" signs in the area and scour the newspapers. However, there are also a few websites that can help you gauge local rental values or help you find resources for rental values in your market:
For a complete set of fair market rents directly from HUD, go to:
• www.huduser.org/intercept.asp?loc=DatasetsFMR/FMR2004f/ ScheduleB_FY2004F_FMR5.pdf
A somewhat more user-friendly version of the same information can be found at:
You'll enter your state and county to get HUD's FMRs in your area.
208 AUTOMATIC WEALTH
I got the annual price per square foot for each of these properties by dividing its monthly rent by its square footage and multiplying that number by 12.
For example, the last property on the list—22 4th Ave.—is an 1,850-square-foot home that rents for $1,350 a month. So . . .
Divide $1,350 by 1,850 square feet and you get $0.73 per square foot monthly. Multiply $0.76 by 12 months and you get $8.76 per square foot annually.
The location is usually the residential renter’s first consideration— in tandem with the number of bedrooms he or she needs.
All other factors being equal, a 1,250-square-foot, two-bedroom house will get a higher rent than a 1,000-square-foot, two-bedroom house. But it’s not likely to be 25 percent higher rent just because the square footage is 25 percent higher; it might only be 5 percent or 10 percent more.
By listing a dozen properties for rent in a table like the preceding one, you’ll quickly develop a sense for what any given property could rent for.
Sometimes, There’s the “Rental Value” . . . and Then There’s the Real Rental Value
If the property you’re looking to buy currently has tenants, your task is easier. It has an established rental value—the amount the tenants are currently paying.
If the tenants are on a lease, better still. Chances are, you won’t immediately have to seek a tenant. Plus, leases tend to make banks happy and improve your chances of getting a loan to purchase the property.
But beware: Not all rental values are what they seem.
I recently saw a listing for a 15-unit motel. It was listed at $1.1 million and claimed to have yearly rents of $159,000. This looked like it could be an excellent deal with plenty of positive cash flow. But on a closer examination, it turned out to be a dog at that price.
The $159,000 was based on weekly rentals at 100 percent occupancy. But the weekly rental rates seemed high by 10 percent at least. The building was also a bit run down. And it was in a location in South Florida where weekly occupancy rates would fall off sharply during the summer. None of that was reflected in the gross rental number of $159,000.
Step 5: Get Richer While You Sleep 209
I asked for the owner’s actual income statement on the property, which he didn’t produce. (If we had gone to contract, I would have also requested his tax returns.)
I ultimately figured that the property probably pulled in about $90,000 a year in actual income, not $159,000. The asking price was too expensive by at least $200,000. Because the property wasn’t in very good condition to boot—and because I had higher-yielding opportunities elsewhere—I didn’t even bother making an offer.
WHAT ABOUT UTILITIES AND OTHER COSTS?
To keep things as simple as possible, I've assumed, for all the examples in this chapter, that the tenants pay the utilities. That's the case with most of my properties. Even on most of my multiunit properties, each unit has individual water and electric meters.