Can You Rely on Rentometer for Market Rents?

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Not all properties are the same

When evaluating potential investment properties, it is crucial to have an accurate estimate of the rent that the property is likely to generate. Rentometer and other online sites (Zillow, Redfin,etc.) are not accurate enough for evaluating specific properties. In this post, I will explain why and show you how to obtain the accuracy you require.

How Online Sites Estimate Rent Online sites like Rentometer and Zillow calculate the average rent per square foot ($/SF) for a specific area based on the number of bedrooms. When you enter the address of a property and the number of bedrooms and baths, Rentometer calculates the rent by multiplying the average area $/SF by the square footage of the subject property.

For example, if the average $/SF for 3-bedroom homes in an area is $1.10/SF, and the subject property has an area of 1,500 SF, then the estimated rent would be:

• 1,500 SF x $1.10/SF = $1,650/Mo

The problem is that Rentometer, et. al., does not take into account the specifics of a property.

Property Specific Examples

Proximity to nuisances - Property A, which is located next to Interstate 15, will have a lower rental price compared to Property B, even if the physical attributes of the properties are the same. This is because of the noise generated by I15.

Property condition - Would you expect this property to rent for the same amount as a similar property in good condition? Rentometer says it does.

Age - These two properties have similar sizes and the same number of beds and baths. Would they have the same rent? Rentometer says they do.

I could continue but I believe you see some of the problems with a site like Rentometer for estimating rent.

Rentometer vs. Actual

As an example of the problem of Rentometer data, I looked up four recently rented properties on the MLS and compared the Rentometer prediction to the actual rental rate. As you can see below, the information provided by Rentometer is nowhere near the actual rent.

To show what a difference the broad range of Rentometer predictions has on return calculations, I used Rentometer to estimate the rent for another property. Rentometer provided a rent range of $1,852 to $2,258, which is a very wide range. Hard to be wrong when your "prediction" has a $406 spread.

Below is the cash flow for this property based on the low, median, and high Rentometer rent projections.

Depending on the Rentometer rent estimate you choose, you will either incur a loss of $94 per month or make a profit of $312 per month. Would you be willing to purchase a property with this sort of information? I would not.

What is the most effective method to determine the rental rate for a property? Experienced property managers.

How Property Managers Estimate Rent

Property managers do not solely rely on recent similar rentals when estimating rent. Instead, they base rent estimates on the current competition. For example, if similar properties were leased for $2,300/Mo, but there are multiple comparable properties currently available for rent between $1,950/Mo and $2,000/Mo, then it is likely that the property will rent for around $2,000/Mo. Past data is not that relevant when it comes to rental rates. Tools like Rentometer only use past data for making rental estimates.

Important rent considerations:

• The current competition compared to the condition of your property is what determines the monthly rent, not prior rentals.
• Your competition is not necessarily the property down the street. It could also be a property located across town, as illustrated below. Prospective tenants who work in the "main job area" consider all properties in acceptable areas with similar commute times.

• Property specifics matter. For example, what if you decided to paint the interior dark green, which is largely unacceptable to the tenant segment normally attracted to your property? You could probably only rent it if you decreased the rent sufficiently below market.

Rentometer, like all online sites, provides only an estimated rent for an "average" property. However, every property is unique, and the actual rent for a specific property depends on various subjective factors, which online rent estimate sites cannot consider.

Summary

Rentometer does not provide the level of rent accuracy required for making investment decisions. The most dependable source for accurate rent information is an experienced property manager. Despite having delivered over 490 investment properties, we always seek the opinion of a property manager for each property before considering it.