How to value a rental property in real estate


Real estate investors have their own way of valuing real estate. Your main goal in a property appraisal is to increase the value each month or year over time to attract buyers and renters. Homeowners rate real estate differently than investors, so their properties must stay ahead in a competitive market.

Rental values ​​are not set in stone and may fluctuate from time to time.

Investment Pricing

It is the ratio between the expected return and risk of an asset investment. Capital asset pricing is a more sophisticated method of valuing income-based rental properties. It states that the only way for investors to earn more is to accept high risk in exchange for the promise of greater returns. Valuing a rental property using this model takes into account certain factors such as condition, age of the property, operating costs, potential rental income, net cash flow, etc.

Cost method

The cost method is often used to evaluate properties that are hard to find for sale and properties that do not generate income. Investors pay no more for a resale property than it would cost to build from scratch. They determine the value of a property by adding up the land value plus depreciation costs.

The evaluation methods mainly use the substitution method and the replication method. When the point of duplication is to replicate the cost of a house with the same fixtures, materials and floors, replace the cost of using new materials with today's building techniques and updated floor plans.

Sales comparison

Owners compare prices of recently sold homes to determine the price of a new property. The best way to make this type of comparison is to compare similar properties with similar characteristics, such as age, square footage, and the number of rooms sold over time. This approach can be applied to own property.

Gross Rent Multiplier

GRM is the current property value on the market in excess of gross rental income. This is the easiest way to value property. It gives investors a rough idea of ​​how many years it will take to pay off the property based on total cash flow.

Rental properties have a lower GRM, which is good for investors. It may also require capital maintenance, such as cooling systems and roof repairs.

Income law

This property valuation method takes into account net operating income. NOI does not include repair costs, depreciation costs, interest or mortgages. It is calculated by dividing the first year of NOI by the property price. The higher the cap rate, the higher the investment.

However, properties with higher capitalization rates may not be as lucrative as they appear. An undervalued property may be the result of a need for repairs. Investors can increase the net operating income of properties with lower capitalization rates by increasing the rent each year and controlling all expenses.

Bottom line

As an investor, knowing your property's value can help you determine when to consider refinancing or when to withdraw money for a new rental property.