Emphasis on “Market” rents, could be the way to go…

The Anfield team utilizes many metrics to evaluate a property.  Of course this is done in an effort to maximize client investment returns for the various investment choices be it multi- or single-family home. It can all be quite daunting… calculating cap rates, cash-on-cash, return with loan paydown, gross rent multiplier, debt service ratio… lions and tigers and bears, oh my!

Through all the analysis, the one thing I’ve always tried to keep in mind is that there are very few wrong answers. Many choices like whether to add a high vacancy factor, or to use more leverage or not, or inserting a high appreciation rate or not… With all the variables, I might argue that there are so many right answers, it’s tough to count them all.

One of the newer right answers is to put more emphasis on “market” rents when evaluating a property (both in listing or buying). I’ve always looked at market rents, but today, I’ve been choosing to emphasize this element because we’re seeing a larger and larger disparity between “actual” and “projected” rents.

Today’s real estate market is certainly in tight supply with higher asking prices, but the rental market is equally in tight supply with rising rents. Given these conditions, good value can still be found without compromising performance thresholds and one of the key elements can be found in taking a more serious look at the near-term future rather than the now (e.g. when do those leases expire? How realistic are those projected rents?).

Economists have been suggesting that the rental market could continue to grow and be strong for up to 10 years based on growth rates in certain the demographic population segments. So, when evaluating income property, don’t get too dug in on the “in-place” performance metrics and be sure to give a solid look at the near term rent upside. As always, let the Anfield team help you in navigating this yellow brick road.