Best Ways to Estimate Rental Income (Pre-Construction)

Topics Discussed:

• Tools available to project rents.
• Evaluating comparable properties and rental listings.
• What additional "upsells" will be included on top of rents?
• What to do if there are no comps.

Watch the full episode here: https://youtu.be/mTuftETWOUI

 Let's talk about drilling down on rents.

You of course have to understand your floor plan. That's probably the biggest key, but what are the two of you going to do when you're trying to back into a proforma rental projection...knowing that your project isn't going to be done for another 18 months?

Chase Leavitt: I never project on, oh, it's going to increase over the next 12 to 18 months. I look at the comps on what it's currently. And a lot of times we've been in a market where it has increased and that's just the cherry on top. So basically like we've been talking about just really doing your research, making those calls, making those visits, understanding the product type or the comps in the surrounding area, and digging a little deeper.

Sherida Zenger: Yeah. Use Rentometer, Rentler, CoStar. There's a lot of great tools out there. Zillow.

Chase Leavitt: I mean, there are some good tools online when it comes to. Renting for what? And what does that look like online? And then you can get your boots on the ground too if you need to.

Steve Olson: So I have two things to say about that.

Number one is when we talk about digging a little bit deeper, something that's really important to remember. We've looked at listings on, on CoStar and online, and it says, Hey, you know, 1295 a month. When you get into that fine. You oftentimes find a different story to be told? Well, and guess what? The pet fee is $50 and we have a technology package of a hundred dollars in a parking fee of $30.

Right? All of this stuff impacts monetization streams that you might have, or that you might be missing out on. And so you have to take that into account as well. I wanted to add one more thing. Something that we've seen once or twice as you go out, you dig around for info. There's a time to push it.

And then there's a time to not push it. But I've evaluated projects before where there aren't comps. So, so what do you do? I mean, sometimes that makes you say, well, why aren't there, but in a market with a low unemployment rate where growth has been happening, You're calling your shot. You are setting the market.

Now that takes a lot of courage. I am not going to sit here and tell you that on your build for rent project, you can, or you should do that, but I'm not going to tell you that you don't have it available to you. If you're feeling confident, you could potentially call your shot and say, you know what? A three-bed, two-bath townhouse doesn't exist in this market.

But the vacancy rate is extremely low. I'm 1600 bucks. And you know what? I know the people are going to line up and they're going to figure. How to take, cause I see all the other projects, projects out there I'm evaluating a community in Indiana right now. The newest apartment complex is from 1990. The unemployment rate is, uh, three and a half percent in the market.

And the vacancy rate is 2%. I think I'm going to call the shot on that. Right, because it seems to me like that's a market that's begging for inventory. Any thoughts?

Sherida Zenger: So going to be conservative, right. So you're going to set your rent at what you think, Hey, this is maybe a conservative number, but that doesn't mean that you can't ask for more.

Steve Olson: Why not? Yeah. You, one thing that I did and I've always wanted to do this and we should do it more, you know, when a mortgage company evaluate somebody and as to whether they can afford a house payment or not, I think it's what, 33, maybe 35. Of their gross income per month. They say we don't want to have a mortgage of more than that.

And a lot of landlords use that too. Like they don't, if a tenant is applying for a thousand dollars rent and they make 2000 a month, that tenant is probably overextended and can't really afford the rent. And so I used a great website called neighborhood scout and pulled neighborhood reports all around this property that I'm evaluating.

And I looked at the median household. And I wanted to make sure that the shot that I'm calling could be supported by not charging more than 35 or so percent of the average annual household income in the area. So then, you know, okay. If I call it somebody there, can somebody actually afford it.

Sherida Zenger: If you can't find a comp, maybe you can find some single-family homes and kind of dumb it down from there?

In the sense of, Hey, maybe they're going to have. Less responsibility living in a townhome, but maybe some people want the yard and the townhome doesn't have the yard. So I think there's some give and take there too. That, yes, it's not the perfect comp, but at least it can help give you an idea and guide you to figure out what the right comp is.

Chase Leavitt: Let's talk about Laguna farms and Napa just for a little bit. Remember, three years ago, what was the comp there? Nothing. Well, almost nothing across the street. There are fourplexes. There's the box building. They were nice, but they were stacked right. A completely different floor plan. And so we had to take a look at those and then we also had to consider, okay, what's in our other project or first one in Meridian, that's the location at that time was probably better, good location in Meridian, the area probably better, closer to Boise state.

And so you just have to kind of go off your gut sometimes with taking in what you know, and what you can see are the comps that are there. And then when you do be conservative about it. And so that's what we did with Laguna farms and we, we probably shot too low, which is okay, we're 1300.

And then over a year period, they're at 1400.

Steve Olson: But it was a low vacancy rate, positive net in-migration. Right. Not a lot of new stuff coming. And we took a look at the market as a whole and said if I'm a tenant that moved here, what are my choices? And that one paid off. We, we called it, we set the market.

We could have been more aggressive.

Chase Leavitt: Laguna farms. I just want to bring that up. That was in my mind was probably a good example. I'm sure we've had other ones off, okay. There's not really a whole lot out.

Steve Olson: Well, we've had the other side of that one too, you know, it's, I mean, that's, we could talk about this forever and maybe we should do another episode on it, so, well, that's some good stuff. I think that was another good high quality yet.

Chase Leavitt: But the thing that I liked that you brought up, and this is the last thing I'll bring up is, is the ad-on.

So when you're doing you, your comps are looking at different apartment complexes or different comps close by what are the ad-on and we haven't really talked about that. Maybe just a little bit, but the add-on. What is the property management company, or whoever's going to be renting that unit? What extra are they going to have to pay for?

Are they gonna have to pay for water, sewer, garbage electricity? Are they going to have to pay for, to get into the clubhouse, to the gym, to use the laundry? You'd be surprised at how many add-ons there are with the comps. And then that might allow you to bump your rents up just a little bit. Depending on what the additional add-ons are.

And you're never going to know what the add-ons are usually online. You have to make that call dig a little deeper.

Steve Olson: They're not very great. And I think it's because they don't want you, you know, they want a tenant.

Well, they want to get the tenant through the door.

Sherida Zenger: We do the same thing, right?

Our property management does the same thing. We have a tech and amenities package that we add. So we have our base rent, but it gets people, at least coming to the door saying, Hey, I'm interested in this unit. Oh. And by the way, this is what's included when they see that there's value there, though. They're usually fine with that.

If you're saying, oh, we're going to have this add on and you're getting the clubhouse and you're trying to charge them 105 bucks. That's not, it doesn't feel good.

Steve Olson: And that tenant here's 1200 in rent and they're going to have it. What about my internet? What about my water? What about my trap? They don't know the real story. So the lower number gets them in the door. But like you said, if the value is there, then they'll take the deal.