Admittedly this is not the most interesting topic you could be reading about today, but it is an important one.
Rent per square foot is a common metric used in the multifamily business. Simply put, it is the unit’s effective rent divided by total livable square footage.
Rent per Square Foot = Total Rent Amount / Total Square Footage
For example, if you have a 1,000 square foot apartment and the monthly rent is $1,500, the rent per square foot would be:
Rent per Square Foot = $1,500 / 1,000 = $1.50 per square foot
The value in this is when we (as buyers) analyze a multifamily property. Comparing the number of beds and baths to other properties with apartments that have the same bed/bath count is not accurate enough. What if the other unit is bigger?
Example-
Imagine you have a 2bed/1bath unit that is rented for $1,000 a month. You see a competitor down the street getting $1,300 for a 2bed/1bath. You automatically assume your rent is $300 below market. Maybe, maybe not!
Is their unit bigger?
Pay close attention to this. If there is an offering memorandum put out by the realtor, look and see if they have provided rent comparable data. Sometimes the realtor will show the rent comparable data in a chart that ranks it with other units by “total” rent. This may portray the unit as being below market in its rent but when you apply the rent/SqFt formula, it’s not.
The bigger the unit the higher the rent (usually) but rent per square foot is not the only item to consider when looking at comparable multifamily data.
Amenities, age, location and reputation, and supply/demand all have to do with what you can ultimately achieve in rent growth. Use the data provided by the realtor but be sure and do some of your own market research. Never analyze a deal from only one source of data.
For more information like this check out my blog at www.realestateraw.com and join my Facebook group Real Estate Raw for Multifamily Investors.
Best of luck!
Bill Ham
