How To Identify and Quantify Rent Premiums

Understanding where premiums (and discounts) exist for a certain floor plan can improve your short-term operating income and help you evaluate investment opportunities.

In a recent blog post I provided suggestions to help you set rents more confidently.  One of the suggestions is to convert rents to “rent per square foot” whenever possible so that your rent data is normalized and comparable across different locations, building types, building age, amenities etc.

For this blog post, I set out to provide an example highlighting how to use rent per square foot, and decided to do this in the context of comparing the value of a 2-bedroom, 2-bath floor plan (2/2) versus a 2-bedroom, 1 bath floor plan (2/1).

I started my analysis with two questions:  1) does a 2^nd bathroom create a premium pricing opportunity?  And, 2) if it does create a premium, can we quantify how much of a premium?

The objective was to determine if the 2^nd bathroom provided a premium pricing opportunity.  Understanding where premiums (and discounts) exist for a certain floor plan can improve your short-term operating income as well as help you evaluate long-term investment opportunities.

Our analysis covered 10 states, 3,406 properties, and 5,264 listings and we used data for large apartment communities since it was the most complete and consistent data set.  All listings were from October 2014 thru February 2015 (a four month window).  For this post, to keep things simple, I’m going to use data and conclusions for one state – Massachusetts.

For Massachusetts we found that there is a 5% premium for a 2/2 floor plan over a 2/1 floor plan.  The results of the analysis are as follows:

So my immediate conclusion was that a 2/2 is more valuable and that a second bathroom can add almost $1,500 per year to gross rental income and $25,000 to the value of a property (assuming a 6% cap rate).   Next, following one of the other suggestions in my prior blog post was to always get input from local real estate experts!  So, I presented my findings to a couple of local experts and both of them immediately recognized the value of a 2/2 vs. a 2/1, but not only because of the additional bathroom.

They both pointed out that a 2/2 floor plan is generally found on newer properties with nicer amenities and better finishes when compared with a 2/1.  This is a key point that enhances the result of the analysis and provides direction for future analysis.

This blog was originally posted on Rentometer on March 9, 2015. Thanks to our partner, Rentometer, for allowing us to publish this information for you!