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