It's reported that, in America, more than 44 million households are renters. If you own property, you may need to conduct a rental valuation.
Rental valuations determine how much rent you can get for your property. They take into consideration similar homes in your area and rely on a series of algorithms to help you can calculate what your property is worth.
If you're a property manager, rental valuations can help you remain competitive in the current housing market. You can use various techniques, which this helpful guide outlines in detail.
1. Sales Comparison
Realtors and appraisers use this method to determine what your rental property is worth. They compare your home against comparable sales in the Greater Atlanta area. These comps are similar to your home and have recently sold.
Look for homes that feature similar characteristics to yours. This might be the home size, bedrooms, lot size, age of the home, and more.
Consider the net operating income (NOI) of your rental property. Compare this number to your purchase price of the current value of your property.
Only include expenses to operate your property. Don't include your mortgage payments, interest, repair costs, or any expenses from depreciation.
To calculate your capitalization rate, divide the first year of your NOI by the price of your property. A higher capitalization rate means a potentially better investment.
If you're unable to find recent comparable homes or if your rental property isn't generating any income, you'll need to use the cost approach.
Take the cost of your property, subtract any depreciation and the value of your land, and you'll receive the value of your property.
4. Gross Rent Multiplier (GRM)
This is the easiest way to determine your property's fair market value.
Take the price or value of your property and divide it by your gross rental income. Your GRM tells investors roughly how many years it will take for your property to become paid off, taking into consideration the amount of gross cash flow it generates.
5. Capital Asset Pricing Model (CAPM)
This method is the most complex way of valuing rental property. It uses the relationship between the risk of investing in a certain property and its expected return. The return should be equivalent to the risk-free return and a risk premium.
This model factors in the condition, age, location, operating expenses, neighborhood rating, potential rental outcome, and net cash flow of the asset. The theory with CAPM is that an investor can earn money when they accept a higher risk.
The tradeoff is that they expect a larger reward. Many investors, however, argue that you can't find a rental with a perfect blend of risk and reward.
Conduct Your Rental Valuation
Follow the tips in this guide to conduct your rental valuation and determine if a property is profitable before investing. If you have multiple properties and find that conducting a rental valuation is too time-consuming (although necessary), you should consider professional property management services in the Greater Atlanta area.
PMI Georgia can help. We offer free rental analysis, so enter your address to determine how profitable your rental property is. You can also contact us with any questions.