Determining rental comps to use when valuating multifamily real estate is highly important. Especially when you're looking to add value to the asset after a renovation. Part of the process involves some sort of online membership-based software that can query all the assets in a market. Some of it is a gut feeling about whether a comp matches and some of it is an investor's knowledge of the market.

This is how I select rental comps and post renovation rents when underwriting multifamily real estate assets. As a broker listing multifamily real estate assets for sale, it is imperative to select the right rent comps to prove achievable rents to the buyers. Buyers aren't stupid. They are going to recognize if a broker is choosing assets way better than the subject in order to sell the idea of higher rents.

I use Costar to narrow down the initial field of assets based on the unit count, age, unit mix, and location in the market. Any similar program to Costar can do the same trick. After looking at the initial list of assets from the above search on Costar, I then use my market knowledge and gut feel to eliminate any remaining assets I know are not a close match.

For the remaining comps, I typically put them in an excel spreadsheet and rank each one as 1, 2, and 3 with 1 being the closest matched asset to the subject. I place more weight on the 1s and the least weight on the 3s. I would typically use the Rank 1 listings and several of the best Rank 2s. I would probably throw away the 3s depending on how many comps I have. As for achievable rent for the subject property, using my Rank 1 and 2 assets, I'm looking for the dollar amount (not $/SF) that is most reasonably achievable after renos. Remember, tenants rent based on dollar amount, not dollar per square foot. I like to be above the smallest rents but not as high as the highest rents. I'm trying to think like a tenant by predicting the rent I'd pay for the subject compared to my other choices.

Then I would suggest doing sensitivity analysis to your proforma as a buyer for different rent ranges based on the comps. How does your IRR and cash on cash look if you got the lowest rent among the comps, the middle tier, or the highest rents? This is the kind of work you do prior to submitting your offer. Once selected as a Best & Final or the actual buyer, then you MUST tour the rental comps to further narrow down the closest selections and resulting ask rents for the subject property.