Real estate investors have their way of property value. Their main goal of property valuation is to increase the value over time, monthly or yearly, to attract buyers and tenants. Homeowners value property differently from investors, so their property has to stay top-notch in the competitive market.
Rental value is not static and can fluctuate from time to time.
Capital asset pricing
It is the relationship between the expected return and the risk of investing in an asset. Capital asset pricing is a more complicated method for valuing income-based rental property. It states that the only way investors can earn more in this is to accept a high-risk level in exchange for the promise of more reward. Valuation of rental property using this model considers certain factors such as condition, property age, operating expenses, potential rental income, net cash flow, and many more.
Cost approach
The cost approach is usually used to evaluate properties where sales are difficult to find and for a non-income-generating property. Investors will not pay more on resale property than it would cost to build from the ground. They determine the property's value by summing up the value of the land plus cost depreciation.
The main valuation methods use replacement and reproduction. Replacement uses the cost of new material with today's construction techniques and updated flooring plans when reproduction focuses on the cost of reproducing the home using the same fixtures, material, and flooring.
Sales comparison
Property owners compare prices of properties that sold in a recent time frame to evaluate the price of a new property. The best approach to this kind of comparison is comparing similar properties with close characteristics such as age, square footage, and the number of rooms sold within a timeframe. This approach can be applied to owner-occupied property.
Gross rent multiplier
GRM is the current property value in the market over gross rental income. This is the simplest way to evaluate the property. It gives investors a rough idea of the years it would take to pay off a property based on gross cash flow.
Rental properties have a lower GRM, which may be advantageous to investors. It may also require capital maintenance such as cooling systems and roof repairs.
Income approach
This method of property valuation considers Net operating income. NOI does not involve repair costs, depreciation expenses, interest, or mortgage. It is calculated by dividing the first year of NOI by the property price. The higher the cap rate, the higher the investment.
However, a property with a higher cap rate may not be as profitable as it seems. An underpriced property may be a result of the need for repairs. Investors can increase the net operating income from a low cap rate property by increasing the rent each year, keeping all expenses in control.
Bottom line
Knowing your property value as an investor makes it easier to determine when to consider refinancing or when to pull down funds for a new rental property.
