Figuring Out Rents And Vacancy Rates In A Neighborhood

Posted @ 8:07 pm - Filed under Buying Income Property, Investment Lessons, RE Investment Practice, Real Estate Investing, Selling Income Property

I won’t quote here, something I recently came across, so as not to embarrass the author, who was surely well meaning. Seriously, some of the things I’ve read this year about establishing rents and vacancy rates are amateur at best, and hopelessly misleading at worst. Some of the advice has been off the wall.

Here’s something ya don’t wanna do in your attempt to find out neighborhood rents.

The #1 mistake would be asking your neighborhood real estate agent. That’s not in any way a slam on house agents. But knowing rents isn’t in their job description. Chances your kid’s teacher, who owns a duplex down the street is a far better source than the agent who sold you your home.

So how do you, as a real estate investor, find out what the rents are on that property you have your eye on? Since yer investing mucho dinero I suggest you, or somebody you trust, do the following. (Of course, this in addition to getting estoppel agreements from the tenants when you buy. Always get those.)

1. Grab a clipboard/pen/paper.

2. Head out to the neighborhood of interest and park yer car.

3. Spend as much time as possible talkin’ to tenants, on site managers, and others you see, in person, belly to belly.

4. Make note of ‘For Rent’ signs and their phone numbers, then call them while standing there. Ask the pertinent questions.

5. Make extensive notes about the interiors/exteriors of everything you see. I bring a camera when I do rent surveys. I make a note of the order of what I see, and describe the picture I took, in order to make it easier to match pics with market info.

Here are some of the questions I typically ask:

What’s the rent? The deposit? How thorough is their background check? Do they take Section 8? In their opinion, are they under rented for the neighborhood? Silly question? Hardly. Many landlords, for various reasons, mostly subjective in nature, keep their rents lower than everyone else’s. Sure, you’ll figure that out while doing this ‘boots on the ground’ rental survey. But how much better to hear it from the landlord straight up? What’s the square footage. (take the answer to that one with a grain or two of salt)

On site managers as a breed, generally love to help out those who don’t try to BS them. I tell them exactly who I am, and what I’m doin’. They appreciate the honesty and the opportunity to strut their stuff. It’s similar, only much, much better when you run into the occasional owner occupant of multi-family income property. Think they pay attention to what the rents are? You bet. They’re almost always pure gold.

5. Visit, in person, all the local professional management companies in the narrowly defined area. They want your business, and will offer any help they can. The caveat I’d add, is they sometimes tend to understate their vacancy rates. Duh They realize they can’t fabricate their rents though, as they can so easily be verified.

Try to talk with several tenant’s in a building if possible. See a maintenance guy around? They’re solid gold info machines. Take him around the corner to the coffee shop and pump ‘em ’till the well’s drained. It’s more likely than not some of the other owners in the area use him too.

The highest quality source are other income property owners. You’re thinkin’, well duh, of course. Yeah, me too. But after having read some of the articles, posts, real estate forums, and emails on the subject, not one said to query income property owners themselves. Go figure. They can also tell you things only long term locals would know. Who maintains their property better or worse than others for instance. Or, who’s been experiencing an outa whack string of vacancies lately. Drugs?

And yes, you can look at Craig’s List. But a word to the wise — use it as your secondary data source. Asking prices for rents are roughly equivalent to pending sales — not worth all that much. Tellin’ a buyer for yer units that the guy down the street is ‘askin’ $1,200 for his new vacancy’ usually doesn’t cut it, know what I mean, Verne? Again — amateur night.

In the end, the more time spent with your own boots on the ground, the more hard, reliable data you’ll accumulate. Can’t tell ya how many times, whether I was workin’ for the seller or the buyer, that my first hand knowledge, based upon my own shoe leather, made the difference. It’s called income property for many reasons, not the least of which is — the value is based upon the property’s income stream, quantitatively and qualitatively. If you don’t know the facts, you could either miss out on a good deal, buy a pig in a poke, or find yourself out of a sale you thought you had.

Over the years, I’ve saved clients literally millions of dollars in both acquisitions and sales ‘cuz I was able to undress the other side’s claims for rent. If I’ve said rents should be higher, I always had empirical, documented evidence awaiting any skepticism. It works almost every time. Real is real.

The best result for a buyer of income property is when you or your advisor does what I’ve recommended here, happily discovering the rents are easily 20% below market. Talk about some pretty quick equity gain.

There’s more, but you get the picture, right? Driving the neighborhood, or Heaven forbid, askin’ the local real estate agent, is the surest way to stay woefully ignorant about what might be the most important data required for the sale/exchange/purchase of income property.

So, you haven’t called, you haven’t written — what’s the deal? Get a hold of me and we’ll figure things out. Special message: There are a small group who’ve been expecting a call from me. I lost your contact info due to an application failure. Please accept my apologies. The situation was remedied this afternoon by accident, go figure. Expect a call this week. Have a good one.

This entry was posted on Monday, November 3rd, 2008 at 8:07 pm and is filed under Buying Income Property, Investment Lessons, RE Investment Practice, Real Estate Investing, Selling Income Property. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.