NCHMA Establishes Guidelines for a Rent Comparability Study

A rent comparability study (RCS) is often required for affordable and mixed-income rental developments. The analysis can be used to establish Section 8 rents, ascertain the rent advantage for Low Income Housing Tax Credit and workforce units, or determine the achievable market rents for unrestricted units. The determination of the market rent potential is often a critical component in assessing the feasibility of any development.

The first step is the selection of comparable properties and then gathering detailed and accurate information on rents, unit sizes, amenities and utilities. Ideally, the properties would be similar in location, age, condition design, and bedroom and bathroom count. This is not always possible, particularly in rural locations, or in locations that have limited rental stock. Therefore, after selecting the best comparables available, adjustments are typically necessary to compare them to the subject property fully.

The Department of Housing and Urban Development (HUD) 99273-S8 and HUD 92273 are two standard rent adjustment grids. HUD 99273-S8 is used for HUD Rent Comparability Studies for Section 8 renewals, however, it is also commonly used in appraisals and market studies.

Several factors influence rent, and analysts need to estimate the rental premium, or discount, associated with each item as part of the rent analysis. 

The adjustments should be supported by market evidence where available. It is important to consider the perspective of a tenant when applying these adjustments. Adjustments should be market-specific and not generic or applied universally. For example, an outdoor swimming pool may command a greater premium in a warmer climate compared to one where it can only be used for a few months out of the year.

Some of the main items to consider are as follows:

1.   Initial Rent – Sometimes, properties have a range of rents for a single unit type that may vary based on size, lease term, floor, level of renovation, etc. Use the rent for the unit most like the subject where possible and that requires the least adjustments. Rents can vary significantly depending on the lease term, so it is important to confirm and adjust accordingly.

2.   Concessions – Concessions distort true rent but have multiple variations. Are they part of an initial lease-up, or due to market conditions? Are they temporary or long-term?  Should the full concession amount be deducted or a partial amount?

3.   Structure/Stories – Typically elevator buildings are more desirable, however, the level of adjustment could vary by market and tenant. For elderly residents, it is not only a desirable feature but an essential one. A townhouse unit may be considered superior to a walk-up or elevator building.

4.   Condition – This can be a significant determinant in a tenant’s choice of rental properties and the value associated with individual apartments. Tenants often value the condition of a renovated or newly constructed property compared to one that exhibits signs of physical deterioration due to age.

5.   Location – Often the most important characteristic. Factors to consider include average rents in the immediate area, home prices, median household income, school rankings, walk scores, proximity to public transport and ease of access to highways, proximity to major employers, schools and colleges, views and crime levels. Sometimes the impact of locational characteristics only becomes evident upon inspection.

6.   Number of Bedrooms/Bathrooms – Many markets have a limited stock of single-room occupancy, studio or three-plus bedroom units, and adjusting for the lack of or the additional bedrooms is necessary. The discount for a studio unit compared to a one-bedroom unit may be different than the premium between a two- and three-bedroom unit. 

7.   Unit Size – Matched pair analyses can be used to evaluate the right adjustment. The adjustment can vary based on unit type. For example, units in renovated mill buildings often have larger unit sizes compared to new construction. While renters do value the additional space, the extra amount they are willing to pay often diminishes as the size increases. Further, due to their large size and ceiling height, the heating and cooling expenses can be much higher. A size adjustment in this case may need to be capped. 

8.   Unit Amenities – It is important to consider the value of the amenity based on the tenant and unit type. For example, a dishwasher and in-unit laundry may be worth more in a three-bedroom unit compared to a studio unit. In a new development, certain amenities may be considered standard, and without them, the property may not be able to compete.

9.   Utilities – Utility packages affect rent. The analyst can consider the utility allowances published by HUD and/or speak with the local leasing agents and property managers as to what is a reasonable estimate of the amount tenants would expect to pay for utilities.

The adjustments should help reduce the differences exhibited by the comparables and the subject. If the range is greater, then it may indicate that some of the adjustments are over- or understated and should be revisited. The adjusted rents indicate the subject’s market rent. The analyst will then determine the point in the range of adjusted rents that best represents the rent a knowledgeable tenant would pay for that unit type. The final estimate, like the adjustments completed, needs to reflect current market conditions. Tenants evaluate rents as a single number and a rent analysis must reflect tenant behavior.

This article and the corresponding White Paper were prepared by Joanne Shelton, a real estate professional with over 25 years of experience in commercial real estate appraisal, financial analysis and market feasibility. To access, please click RCS White Paper.

The National Council of Housing Market Analysts (NCHMA) is the only professional body dedicated exclusively to enhancing the professionalism and standards surrounding residential rental real estate market analysis. NCHMA’s members are comprised primarily of professionals involved in performing and reviewing residential market studies and underwriting residential real estate.