Learn some hot tips on how to value a Rental Property, all based on how much you get from your rental Income
Hi there, terrific SimplVest readers
This edition of the SimplVest Newsletter, will explore rental investments and rental income.
In this newsletter you will learn about:
- 🏘️ Investment properties
- 🧮 Methods used to evaluate the potential value of a rental property
- 😫🤡 Common mistakes made when evaluating the value of a rental property.
Real estate asserts that property investment is a wise choice for high rental income. Investing in properties is not something anyone can wake up and choose to do. Some people believe that real estate investment is only for the rich, but that thought is wrong.
Home is where you can make it, and home is also where you can secure more bags.
Making money from property investments can be an intriguing venture. It requires discipline, a keen eye for potential, strategic decisions, and a touch of intuition.
Everyone loves to know wherever and whatever they put their money into, and it is no different with investment properties.
To gain an edge, understand your desires and how to value them, especially in the case of rental property.
In real estate, it’s often said: “You make money buying, not selling.”
Property investments yield high profits as rising rents create a steady stream of income, making it a simple money-making avenue. Overpaying for properties is a common mistake. Professionals advise trying out before diving into the real estate contest.
First, know that there are two income measures: Gross Rental Income and Adjusted Gross Rental Income. The two are different measures which every real estate expert or novice willing to join the club should know. Landlords gather Gross Rental Income as the total amount of rent without adjusting for other costs.
The total income generated from rent, minus losses incurred when abandoning the property, constitutes Adjusted Gross Rental Income.
Valuation of Rental Properties
Explore the simplest valuation strategies used by real estate experts to calculate rental property value. They include:
🏘️Sales Comparison Approach (SCA)
The Sales Comparison Approach (SCA) is crucial for property valuation, comparing new rentals of similar properties in the same area.
Investors using the SCA dig into factors like the prices of similar properties already in the market. Compare the new property with recently sold properties, referred to as similar
The SCA gauges a relative price value by measuring features like bedrooms, bathrooms, garages, decks, fireplaces, or pools. A property’s value may decrease if a comparable property has higher quality features, like an office with a conference room.
The SCA considers factors like proximity to healthcare, schools, and parks, influencing higher asking rents. Examiners and real estate agents commonly depend on the SCA for property quizzes. Note that, although widely adopted, it may not serve as the final prediction tool for real estate valuation.
💸Capital Asset Pricing Model
The CAPM, a vital tool in property valuation, focuses on estimating risk and opportunity cost in investment.
Compare potential ROI from rental income with lower-risk alternative investments in this category.
If a risk-free investment offers higher returns than expected rental income, investing in rental property may not be financially wise.
Location, property lifespan, and safety emerge as critical factors influencing this valuation approach. A Northern Nigeria rental, with security challenges, may yield lower ROI compared to a safer property in the South West. This analysis clarifies decisions, giving investors a strategic advantage to fine-tune choices before committing capital.
💰Income Approach
The Income Approach places a crucial focus on the expected rental income concerning the first investment in rental property assets. Widely used in commercial real estate, this method evaluates a property’s potential rental earnings against the initial cash payment. Income Approach calculates annual capitalization rate, a key measure for assessing investment financial viability.
For example, consider a school building with an acquisition cost of $150,000 and a launched monthly rental income of $1,500. Calculate the projected annual capitalization rate by dividing $18,000 by $150,000 to get 0.12 or 12%.
In real estate investing, understanding the Income Approach is crucial for property owners and investors aiming to improve returns.
Cost Approach
A significant factor of real estate valuation is the cost approach. Use this method to determine a property’s value based on its most crucial and possible use.
This method involves combining the assessed land value with the depreciated value of any structures on the property. Real estate professionals oftentimes tie the concept of the highest and best use to briefly summarize the cost approach.
Mostly use this approach when assessing the value of vacant land. It leans heavily on the influential factor of property zoning. If a property lacks commercial zoning, its value may decline, because the process of rezoning incurs more costs. Apply the cost approach best for newer buildings; it may prove unreliable when used for older properties. However, its relevance shines when dealing with properties boasting unique or specialized uses.
Investors that seek to strengthen vision and make conscious market decisions, do well to understand and leverage the cost approach. This is because the method has shown to investors that they can stay ahead in the competitive real estate market.
Determining the best value for a rental property involves a strong analysis of various key factors. Smart rental investors carefully assess the discussed valuation factors before making crucial decisions about their property investments. Essential valuation concepts guide investors and serve as stepping stones into a secure space in real estate investment.
Investors assess preparedness, explore foundational elements, and gain necessary insights for effective navigation in the competitive landscape. These methods not only enhance understanding but also provide investors to make data-driven and strategic rulings concerning rental properties. Explore foundational elements, gain insights, and navigate the competitive landscape for successful real estate investment.
