Rental property investors have a lot to consider when they look at new properties. However, valuation is one of the key concerns. You want to know that you are paying a fair price for the investment. However, there are several methods for rental property valuation.
How do these methods work? What do they tell you about a property? This post is part one of two covering five methods of rental property valuation.
Methods of Rental Property Valuation
Sales Comparison Approach
The sales comparison approach (SCA) is the first type of valuation most investors consider. It is the most common valuation method, and professionals across the real estate industry use it. Along with that, it is probably the simplest and easiest to understand.
It compares the property in question with similar properties recently sold in the same market. Investors may even look at a historical view of the SCA for a property. A timeline view can help investors identify shifts or trends in the market.
The valuation usually starts with similar recently sold properties and then adjusts from there. For example, you might use price per square foot as a baseline. From there, the appraiser might adjust for several factors. These factors could include the number of bedrooms and bathrooms, garage or driveway access, and luxury features.
Gross Rent Multiplier
With the gross rent multiplier (GRM) method, you have another option for valuing rental property. It is also a fairly straightforward metric. As the name suggests, it focuses on valuing the property based on the amount of rental income it can generate.
GRM is a way of comparing the rental income of properties while going beyond the flat income numbers. GRM factors in the capital investment in the property along with potential rental income to provide a more useful metric.
For example, you might have one property that generates $24,000 in annual rent and another that generates $36,000. On the surface, it might look like the investor is better off with the property that generates $36,000 in rent. However, that does not account for the purchase price of the properties.
To calculate the gross rent multiplier, you divide the purchase price by the annual rental income. Let’s say a property costs $250,000, and you expect to collect $30,000 in rent. The GRM would be 8.3. In general, investors want the lowest GRM possible. However, the definition of a “good GRM” will vary depending on the market.
These are just two of the more common methods of property valuation. Click this link to learn about more valuation methods in part two of this post.
Property Management in New Orleans
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