Analyze a “Below-Market” Deal: Nearby Rents

Unfortunately when you’re looking at single-family homes, it can be difficult to get an accurate read on what people in the neighborhood are currently paying in rent. However, studying asking rents in the rental section of Craigslist is the next best thing, and it is definitely better than nothing.

Do a search for the neighborhood the home is in, and open every single listing that looks like it might be nearby and comparable. It shouldn’t be too difficult to get a list of at least five or six nearby similar homes that are currently up for rent.

In our example scenario, we searched Craigslist and found six rental homes nearby with similar characteristics (3 bedrooms, 1.5-2 bathrooms, 1,500-2,000 square feet). The average asking rent was $1,425 a month. If we put 20% down on the $190,000 home, our total monthly payment (PITI) on a 30-year fixed-rate loan at 5% would be around $1,050 a month. With payments about 25% lower than the asking rent on comparable homes, this home is not a screaming deal, but the price does seem to be below market.

I would say if the total monthly payments on a home would be more than 20% below the monthly rent you come up with in your research, you might be looking at a home that is priced below market.

How To: Analyze a “Below-Market” Deal


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

21 comments:

  1. 1
    Cap Hill Renter says:

    Word of caution about Craigslist rental postings, the more expensive and/or unrealistically high rental units stay on the website, whereas good deals on rents tend to be taken and removed from the listings quickly. (Note, this generalization is based on looking at rentals only in Seattle’s more popular neighborhoods, and the slowdown of the housing market has slowed down rentals as well. I remember during bubble times, affordable rental listings would often be posted for an hour before the listing agent had 20-70 people interested and pulled them off Craigslist).

    If the average rental price in the neighborhood is $1400, it may be because similar houses rent for $1100 but are quickly swiped up, and the numbers are swayed by higher rents on units that flounder on the market unrented. Good general method for trying to figure out what rents are, but may require checking Craigslist regularly for a period of time to capture the price on units that get rented out quickly.

  2. 2
    softwarengineer says:

    Actually, IMO, a Good Example Tim

    If you add in the approximate $200-300/month property tax and insurance on a $190K home, the rental at $1400 is about the same price; with a caveat. Albeit the tax and interest are deductable now, Lord Only Knows what tax increase elimination of the mortgage interest rate deduction is up the Congress/Senator legislator sleeve to par down our $1.2T annual debt. Saying anything is in the bag now-a-days, with monstrous balloon federal debt and Tea Party with axes out, is ludicrous, IMO.

    Therefore, I’d say your example was about rent= buy for now. But add in about $200-400/mo upkeep if/when the tax deduction is eliminated [they approx zero each other out for now]. Then renting the $190K home would be cheaper than buying at $1400/mo.

  3. 3
    Ahau says:

    RE: softwarengineer @ 1 – Tim’s example did include property tax and interest (they’re the T and the latter I in PITI).

    Principle and Interest alone at 5% on a $152K loan (using his assumed 20% down on a $190K purchase) is $816/mo.

  4. 4
    ray pepper says:

    I agree with this on the above exp: ” this home is not a screaming deal ”

    ………..and I will leave it at that…………………

    off to Claim Jumper!

  5. 5
    rationalguy says:

    The easier rule of thumb, take the annual rent and multiply by 11 for fair deal.
    1400*12*11 = 184,800. This is close to 190K. If you can get house in multiple of <=10, good deal. 11 is fair deal. 12 may be if you really like the house. Any multiple above 12, you are really lookng at overpriced place.

  6. 6
    B&W NIkes says:

    I’m curious: in looking beyond the basic measures of comparable listings and especially in comparable rentals, how would one measure or calculate differences in quality of amenities? It seems both aesthetic and practical differences must have value of some kind. Very subjective, but things like parking, appliances, appearance, proximity to services, and mechanical soundness have all got to have some serious influences on value in addition to raw price per square foot and neighborhoods.

  7. 7
    Michael Long says:

    I’ve found that Craigslist is a terrible place to look for apartments. I’ve had much better luck just walking around the neighborhood and ringing managers buzzers. I estimate that you can save at least 15% – 30% through this tactic. Craigslist usually has the most overpiced apartments.

    As for rent vs buy. My last house in Wallingford was $1300 (+ utilities) it was listed at $450,000 for sale when I moved. My current townhouse in Wallingford costs me $1200 (including utilities) and it would sell for $370,000. As a side note the townhouse is far better than the more expensive house.

  8. 8
    Aaron Smothers says:

    My wife and I have been renters since moving to the Seattle area. The earliest that we could have bought a house was in 2006. We have kept postponing the decision till now (and into the foreseeable future).

    Buying a house is not just a purely economic decision for me; I won’t buy a house just because it’s priced favourably, if the location, builder, or any number of other factors are not to my liking.

    I pay for my 3 BR apartment an annual rent of about $18000 (including parking and trash). I also pay about $180 for renter’s insurance per annum. Over the past 4 years (including 2010), I have paid about $72000 for my shelter. My place of work is a block away from my apartment.

    I have been tracking several 10’s of houses of interest to me over the past several years. Among them, there is not a single one which hasn’t fallen in Zillow value by more than $72000 over the past 4 years. Many have fallen in value by more than $100000, and some, by more than $250000.

    In addition, the interest rates have come down in my favour, from 2006 till now.

    Therefore, in strict restrospect alone, I have been better off renting than buying.

    Is there a fallacy in this line of reasoning?

    AS

  9. 9
    Scotsman says:

    RE: Aaron Smothers @ 7

    In the 3 years I’ve had my rental its dropped $150K in both Zillow and my own market survey, although the starting and ending points points are different for the two analyses. I’ve paid about $65K in rent, but saved $18K in property taxes for a net gross cost of $47K. I figure I’m at least $100k to the positive and still growing.

  10. 10
    EconE says:

    RE: Cap Hill Renter @ 1

    +1

    Lots of stale overpriced rentals on CL. Many seem to be 20% overpriced IMO.

    Don’t forget about the opportunity cost on the 20% down payment (not sure why there is no mention of it in the blog post as it was talked about quite frequently in 2006-8.)

    Maintainance is also usually much more expensive than one would expect. I sure found that out when I was a homeowner and I did most of the work myself.

    The 8% – 10% round trip fees for buying and selling should also be taken into account.

  11. 11
    JW says:

    i’ve told this story before- bought a new condo in 2005, identical condo one door over purchased by my neighbor for exactly the same price. factoring all in (including HOAs) i paid about $2200/mo for the five years i lived there. the condo next door rented the for the same time period for $1200/mo.

    Then I sold and paid out 40k at closing this past summer because the sale price was well under my purchase (this after the condo was listed for over a year).

    All said my neighbor, who rented paid $72000 over the five years for his shelter. I paid $132,000 for exactly the same thing (not 20′ away from his door)- then on top of this it cost me another 40k at closing, for a sum total of paying $100,000 more than my neighbor over the past five years for EXACTLY the same condo.

    So don’t think lessons in real estate were lost on me, and why i am so cautious with the purchase of our next home (a house)

    One interesting note however, is that at the peak of the bubble the other identical condo one door to the otherside of me sold for 65k more than our initial purchase prices -he made out really good. As they say…timing is everything!

  12. 12
    ray pepper says:

    RE: JW @ 10

    condos are toxic. Coming outta the gates this week I see one in Edgewood for 18k and 1 in Puyallup at 20k and a buttload in King/Pierce in the 40k range. With 250+ dues and taxes/insurance you got a payment of 400.00-500.00 (if you pay all cash) while they rent for 500-700 I say they would almost have to PAY ME to take them.

    There are just so many Condos coming in 2011 that these glorified apts are as TOXIC as they come.

  13. 13
    JW says:

    Yeah, and the funny thing is they have in my opinion long held that reputation, before the bubble anyway, and then the bubble years came along and people like me abandoned history as a guide thinking and bought into, literally, the condo craze.

    I’ll also add one more lesson i took away from this is also to never again by into anything that involves an HOA, ever again. I wish I had known about the potential pitfalls of an HOA prior to my purchase (I was young and naive when i bought the condo)…cause hell those pitfalls are an enormous liability.

  14. 14
    zipzippygc says:

    Hidden but very real factors have to be discovered and somehow factored.

    Example: value of the neighbors and other external factors. By value factoring, I mean: barking dog all day every day = minus 15K. Lawnmower/Leafblower guy at 7am every weekend = minus 5K. Neighbor who seamlessly has your back, uses mature discretion, notices any aberrant activity = +30K. Dead quiet after 9pm = +35K.

    Same thing for condos. Multiple toddlers on a late swing shift schedule = minus 35K. Possible neighbor drug use and cops occasionally showing up = minus 30K (they tend to pass out quicker than toddlers on sugar at midnight, so slightly less costly to me). Litter and shopping carts = minus 5K. Multiple thefts = minus 50K. No shared walls, quiet with polite neighbors = + 40K.

    These are examples of ‘costs’ (pyschic, emotional, satisfaction) and from now on, I am going to pencil them into rent equivalency. They are not transactionable in monies per se, but they are worth money and therefor can be quantified.


    Idea: a web site equivalent to SeattleBubble, but examing the curiousities, over inflated value, conditions of rental SFH and condos is overdue! A small army rent and they need an outlet to brag or vent, to the education of all.

  15. 15

    […] amount at a minimum.How To: Analyze a “Below-Market” DealIntroductionComparable SalesNearby RentsHistoric PricingConclusionFull disclosure: The Tim is employed by Redfin.Posted in Features | Tagged […]

  16. 16

    RE: zipzippygc @ 14RE: JW @ 13 – I think JW learned the wrong lesson about HOAs. You need a well run HOA, be it a condo or a neighborhood. It’s something to research before you buy, although sometimes it’s obvious (e.g. a condo with an exterior in poor condition).

    And the reason is the “neighbor from hell” that zipzippygc sort of hits on. If you own a place and two years later a neighbor moves in with a barking dog or other issues, you have no recourse in many places. The only way I would ever again live in an area without an HOA is if it was at least a 5 acre parcel.

  17. 17

    RE: ray pepper @ 12 – I would agree there are going to be a lot of complexes that are bad, but not all of them. I would tend to avoid complexes with a lot of turnover between 2004 and 2007.

  18. 18
    Ron Nelson says:

    The Question I have is how the rental market doing?

    I live in Renton and there is the Landing Apartments that have roughly 7-800 apartments it looks like about 50% or more are empty, just judging by the Patios and lights on during the evening.

    Up at the top of the Hill there is another couple of Condo/Townhome buildings that were being marketed for first time buyers and now have gone apartment.

    Also there is an apartment building that had 2 large buildings that 1 a couple of years ago burned down they are now renting the 1 building with well over 50%+ vacancies, they have been on the Market for nearly 1 year.

    My thoughts are that when the music stops, what is the REAL VACANCY RATES?
    I think the Numbers are largely hidden and that the apartment owners investors don’t really want the street knowing the real numbers “its not in there best interest, in keeping rents high.

  19. 19
    Jonness says:

    By softwarengineer @ 2:

    Albeit the tax and interest are deductable now, Lord Only Knows what tax increase elimination of the mortgage interest rate deduction is up the Congress/Senator legislator sleeve to par down our $1.2T annual debt. Saying anything is in the bag now-a-days, with monstrous balloon federal debt and Tea Party with axes out, is ludicrous, IMO.

    Haven’t we already seen how this will play out? Democrats will favor putting a cap on the deduction in order that the middle class not be affected by the cut. Republicans will rally to support the rich. At the end of the day, the tax deduction will be held in place for all Americans, and an additional half trillion dollars of pork barrel spending will be attached to the bill.

  20. 20

    RE: Jonness @ 19 – I’m pretty sure there are already some caps on the home interest deduction. Also, I don’t see the Republicans opposing a change on the rich that much because this deduction isn’t that important to them.

    The reason I don’t see it going away is that propping up housing is still too important for the government because it’s too important for a number of large financial entities that are important to the government. What needs to be done is to go back to the restrictions where the deduction is limited to basis (or purchase price if higher than basis).

  21. 21
    doug says:

    I might be wrong, but this seems like an awfully pessimistic take on ownership

    Not having to move, and not having my rent be subject to the whims of a landlord (our rent just went up 30% in a year), having a home that you can actually call your own, and not having the possibility of being moved out at the end of your lease are all valuable to us.

    We’ve found a house that, after our HOA down payment, will cost the same as renting a similar home in the area, maybe $100 more. It’s been inspected, and needs nothing done to it. Being able to afford the 30-year fixed payments fairly easily, it seems to make sense.

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