What is the current market value on the monthly rent for your investment property? That seems to be the million dollar question these days. There are many resources to pull from to find your answer. The most popular seems to be searching the internet on rental marketing sites such as Zillow.
As of late, many owners are reaching out to us and informing us that the rent we are charging their tenant’s is low compared to Zillow. And yes, this is true. There are three factors that are causing this to happen. And we would like to explain in more detail.
Factor One: the rent that we are charging your tenant may be much lower than what Zillow states if the lease renewal was completed more than 3-months ago. The rental market in Arizona is increasing so quickly that even after a month has passed since the last lease renewal, the rent increase we just did is already lower than the current rental market rate.
Factor Two: Zillow’s algorithm doesn’t work. An article was posted in the NY Times and The Hill talking about how Zillow had to lay off one quarter of its staff because the division that made instant offers on homes lost more than $420 million dollars within a three-month period. Their algorithms couldn’t predict forecasting home prices. They tried to automate something that was not able to be automated – human capability of knowing their market because they are boots on the ground.
This is the same for rentals. Zillow’s algorithms cannot forecast properly in our local markets. Their rent Zestimates are not accurate. Think about it logically, anyone can list any property for any rent amount they want. This site isn’t just for realtors. It is a site used by consumers mostly. Some owners that are self-managing are not exactly in-touch with the local market because they do not live in the state. And in some cases, Zillow includes furnished, vacation rentals in their Zestimates. These properties are always higher in price than a typical 1-year lease, vacant property.
Factor Three: Based on actual experience, most of these rentals being marketed on Zillow and other websites are already leased. A lot of times, rental websites syndicate down to each other and advertise on multiple platforms. For example, you can enter your renal listing into Zillow, and it will syndicate down to other various rental websites. However, when the property is leased, either the person who is marketing the listing doesn’t show that the property has been leased and the price it leased for. So, in essence you are seeing homes not available at rental prices that do not necessarily reflect the amount it leased for.
In today’s market, most Property Managers are not even using the Multiple Listing Service (MLS) to market their rental properties. There is such a shortage of housing, with both rentals and sales, that by the time the property is entered into MLS, there are already multiple applications. So, MLS is not always a great source to use for rental comparables currently because it lacks data.
The best rental comparable you can use are properties within a square mile of the subject property that have leased within a month of the day that you are pulling the comps. This can be more challenging than you think. But we have this data. We call it “Rent Match”. Rent Match is a feature that we pay for within our property management software, Appfolio. Appfolio is a software application that property managers use to do their accounting, repairs, and marketing. Appfolio is a large company with many users/property managers. They share the leasing data with all their users. For example, if a property manager that uses Appfolio enters a lease with a tenant. They enter in the terms of that lease including the rent amount. The rent amount and the community where the property is located is shared to all users of Appfolio. So, when I generate a Rent Match Report, it will show me all properties within a square mile, the number of bedrooms, bathrooms, square footage, community the property is in and the rent price. I can look at real data of homes that have leased, not what homes are being marketed for. These are real comps.
As an investor, if you are currently collecting $1500 a month and you go on Zillow, and Zillow shows a rent Zestimate of $2200 a month. I understand the excitement. Expenses are increasing and rent also needs to increase. However, you must understand your local market. If you understand your local market, at least the market in Arizona, you will also understand that yes, we have a housing shortage which is causing the rent prices to increase. But the tenant’s salaries are not going up. Their income remains the same. And in some cases, if you raise the rent to what you think is comparable, you may price your tenant out of the home. This may work out for you. However, if your tenant moves, and you are unable to get another tenant in the home for the amount you were expecting, you just lost money. So be aware of your local market and understand the forecast before you rely on rental websites such as Zillow.
