Owning rental property has become one of the most popular investment methods, with two-thirds of wealthy Americans owning a second home. If you've considered investing in rental real estate, the first step is finding the right property.
Unlike buying a home to live in, this purchase is all about the numbers. A rental valuation is necessary to determine if a property is a smart buy.
Sales Comparison
Appraisers and real estate agents commonly use the sales comparison method. They identify comparable recently sold homes in the same market to compare to those they value. Preferably, as close as possible in size, number of bedrooms, bathrooms, and features.
Recently sold homes are ideal, reflecting the current real estate market. This method isn't an exact science but more like an art to determine property value.
Here in the Lake Havasu area was recently named one of the US cities with the highest home prices. Thanks to its high resident median age and reputation as "Arizona's Playground," the median price tops one million dollars.
Gross Rent Multiplier
This is the simplest method for a rental property owner to use. This method tells you how long it will take to pay off the property with the income it generates.
Property price/gross rental income= gross rent multiplier
Ask a local property manager if you are unsure of your calculation accuracy. This is a great way to determine how knowledgeable they are.
Cost
The cost approach method is used by real estate investors who will not buy a home for more than what it would cost to build the same house from the ground up.
To use this method, use this formula: land value + cost-depreciation= property value
There are two methods for using this valuation approach. The first is reproduction, which uses a valuation that reproduces the home with the same materials and fixtures. The second is a reproduction method that uses the cost of updated materials and fixtures.
Income
This is the valuation method that small-scale investors use, particularly if they want to generate monthly income from their investment property. This method focuses on net operating income (NOI). You may hear this method called cap rate.
NOI/property price=cap rate
The higher the cap rate, the better the investment return.
Capital Asset Pricing
This is one of the most complicated methods for determining rental property value. Working with a property management company can help reduce your stress if you struggle with it. This valuation method explains the connection between your expected return and investment risk.
To simplify the assessment, the greater the investment risk, the greater the reward. This valuation method takes several property factors into account:
- Age
- Condition
- Operating expenses
- Neighborhood condition
- Geographical location
- Potential rental income
- Current net cash flow
Perform Your Rental Valuation Calculations
As you can see, calculating rental valuation will involve doing a lot of research and math. This can be time-consuming. An easier alternative is to work with property management services that provide these valuation services.
Our team of property managers at PMI Lake Havasu works with clients to do a thorough rental analysis. That way, our clients can make informed decisions about their investment properties.
Request a free rental analysis today and learn what your investment property's value is.
