You want to buy a rental or a house that you’ll turn into a rental. How much should you pay? The calculation usually starts with how much rent you can charge, then deduct expenses, divide by the return you want and voila!
So far so good but how do you know that the rent you get today will be the rent you can get tomorrow? If your tenant moves out, how many new renters will be lining up to move in?
For Rent
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In good times that’s often not an issue. It hasn’t been in recent years. But during times of economic stress the number of people willing to pay the rent you need can shrink dramatically, especially at the higher rents. And at the lower rents your tenants will be more likely to encounter financial problems that affect their ability to pay.
Wouldn’t it be nice to own a property in the middle of the rental range, where you’re least likely to have these problems? Or at least to know what that range is, so you can decide what level of risk you’re willing to take?
You can ask local real estate agents about rents but you won’t get a dependable answer because they only know what new renters are paying. Even large landlords don’t know what the local rental range truly looks like because they see only one section of the market. What you need is an objective survey of rents within the narrow area where you plan to buy.
Fortunately, the US Census Bureau does just that. It constantly surveys the US population about all sorts of social and economic things. One of them is how much rent people pay. And it reports the answers for zip codes.
There are technical problems turning the Census surveys into helpful data. How do you turn yesterday’s rents into today’s dollars? How many answers do you need in an area to get meaningful results? How do you decide what’s the right range?
Look at the table, which shows the 2018 Census estimates for how many renters pay how much in the 20171 zip code of Herndon, Virginia.
Favored Price Range
Local Market Monitor
It’s clear that you’ll find the most renters somewhere between $1250 and $2500. We can refine the data a bit more, update to 2020 dollars, and with a 5 percent rate of return translate to a favored price range of $448,800 to $569,000. If investors buy in this range in zip code 20171 they’ll have the least trouble finding renters, now and in the future.
In this zip code the difference between the top and bottom of the favored price range is $120,000. In the nearby zip code 20186 the favored price range is more spread out, $248,000 to $457,000, for a difference of $210,000. The range isn’t a formula, it has to be calculated from the actual rent profile.
The favored price range is a practical tool for investors. Other data from the government can also be very useful. The Census tells us how many people live in a zip code and how many homes are there and the percent of people who rent. Elsewhere, at fhfa.gov, we can find out how much home prices in a zip code increased in the past few years. Some of these data points can be maddeningly difficult to extract, be patient. But modern investors must take advantage of the useful knowledge they’ll acquire to help them refine their investment decisions.