There are more than 2,600 new renters every day. How do you make the most of your real estate if you're also eager to rent out your property?
Understanding rental valuation will help you learn the answer to this question. This tool lets you know if you're renting out at the market price.
Keep reading to learn more. Below, we'll explain what rental valuation exactly is, its importance, and several methods to value rental property.
Rental Valuation — Overview
Rental valuation is the process of determining a property's rental value, which is a rental property's fair market value. Property evaluators typically conduct this process. These evaluators will synthesize information from contemporary market analysis, location analysis, location analysis, and other metrics to determine the value in question.
Importance of Rental Valuation
Investing in rental homes is a great way to make an income. But the value of your property will fluctuate, so it's critical to stay up to date on the most recent market price.
This will help you, as a landlord, get the best market rate for your rental property. Knowing the actual value of your property can help you negotiate a better rental rate, whether you're renting out a house, an apartment, or a commercial space.
How to Value a Rental Property
There are several methods landlords can use to value rental property. None are the singular best way, and many investors use multiple methods for ultimate accuracy. Contact an expert if you'd like to learn more about rental evaluation.
1. Sales Comparison
The sales comparison approach uses the selling price of already-sold homes similar to the rental property valued as a calculative touchstone. The similarity is determined by characteristics such as square footage, age, number of bedrooms and bathrooms, and more. The homes should ideally also have been sold within the last 30 days.
2. Gross Rent Multiplier Approach
The gross rent multiplier approach values properties based on the income they generate in relation to their cost. This valuation method can be useful in markets where rent prices are particularly erratic. But while the formula is quick and easy to use, it does not account for certain operating costs such as property management, upkeep, repairs, etc.
3. Cost Approach
Investors use the cost approach when recent sales data is unavailable and/or the rental property is not currently being rented out. The cost approach formula is as follows:
- Property value = cost - depreciation + land value
This approach uses two techniques — the replacement and reproduction value techniques. The reproduction approach determines the value of a rental property using the same materials, furnishings, and floorplan. The replacement strategy calculates according to the lower cost of new materials, a more modernized floor plan, and modern construction methods.
Rental Valuation — Do it Right!
Rental valuation is critical for making the most out of your rental property. Come back to this guide if you ever need an essential refresher on why that is.
HomeRiver is comprised of some of the best real estate experts in the Tampa, Florida region. That's how we can provide quality rental real estate services and tools to landlords in Washington, DC! Check out our other landlord resources if you'd like to work with us.