🏘️⏳How to Value a Rental Property based on Rental Income

Hi there, terrific SimplVest readers

This edition of the SimplVest Newsletter, will take you through how many experts really make returns off rental investments,

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.

Professionals, moneybags and other big names in the real estate business already told us that investing in real estate will kick start a process of huge statements on rewards and the return on investments. Investing in properties is not something anyone can wake up and choose to do. Some even believe that real estate investments are only for the rich, and I am delighted to let you know that is wrong. 

Home is where you can make it, and home is also where you can secure another bag. 

Are you interested in making money from property investments? Sure it takes unique discipline to look above the fat ROI of rental properties, however, discipline is not the only force needed. Everyone loves to know wherever and whatever they put their money into, and it is no different with investment properties. 

To then gain an edge over others who only dream of investment properties, it is important to have a solid understanding of what you want, and how to value your wants, which in this case is the value of rental property. 

In the real estate community, a particular saying quotes that money is only made when the property is purchased and not when it is sold. Often, people have made the mistake of not knowing the value of a rental property and this makes them pay more than normal.

Property Investments will always turn high profits, and this is because rents provide a rising flood of revenue which makes it a simple way to make money. Some make the mistake of overpaying for properties which is why professionals suggest that it is necessary to make tryouts before diving into the real estate contest. 

Before anything, it is necessary to know that there are two income measures and they are 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. Gross Rental Income is the total amount of rent gathered without adjustments for other costs. Adjusted gross rental income is then the total amount of income generated from rent minus losses incurred when the property was abandoned. 

Valuation of Rental Properties

There are various valuation strategies to calculate the value of a rental property, so let us walk you through the simplest strategies used by real estate experts. They include:

🏘️Sales Comparison Approach (SCA)

The Sales Comparison Approach (SCA) stands out as a crucial form of property valuation, discussing 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. Here, the new property under consideration is compared with recently sold properties, termed similar.

Using a measure of features and attributes, the SCA gauges a relative price value, considering aspects such as the number of bedrooms, bathrooms, garages, decks, fireplaces, or pools. For instance, if a similar property has higher quality than the subject property — like an office space with a conference room — compared to one without these extras, the value of the comparable property may decrease.

The SCA takes into account additional factors such as proximity to healthcare facilities, schools, and recreational parks, affecting the reason for higher asking rents. While examiners and real estate agents commonly rely on the SCA for property quizzes, it is necessary to note that, although it is widely adopted, it might not serve as the final prediction tool for real estate valuation.

💸Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is also one of those vital tools in investment property valuation, and it is centred on the estimation of risk and opportunity cost. This category involves a thorough comparison of the possible return on investment (ROI) obtained from rental income against alternative investments with lower risk profiles. In simpler terms, if a risk-free investment holds the promise of a higher return than the expected ROI from rental income, opting for a rental property investment might not be financially safe.

Location, property lifespan, and safety emerge as critical factors influencing this valuation approach. For instance, a rental property in Northern Nigeria, characterized by security challenges like kidnapping and banditry, may present a lower ROI when compared to a property in the safer South Western region. This insightful analysis serves as a valuable tool for clarifying investment decisions, providing a strategic advantage for investors to fine-tune investment decisions 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 utilized in commercial real estate investment calculation, this method involves a careful evaluation of a property's possible rental earnings, compared to the first cash payment for its acquisition. The Income Approach relies on calculating the annual capitalization rate for an investment, a key measure in assessing its financial viability.

For example, consider a school building with an acquisition cost of $150,000 and a launched monthly rental income of $1,500. The expected annual capitalization rate is calculated as follows: $18,000 ($1,500 x 12 months) ÷ $150,000 = 0.12 or 12%. 

In the active space of real estate investing, understanding the Income Approach is necessary for property owners and investors seeking to make conscious decisions and improve their returns in an engaged market.

Cost Approach

The cost approach, a significant factor of real estate valuation, determines 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.

This approach gains particular relevance when assessing the value of vacant land, bending heavily on the influential factor of property zoning. If a property lacks commercial zoning, its value may experience a decline, as the process of rezoning encounters large costs. Notably effective for newer buildings, the cost approach may display a degree of unreliability when applied to older properties. However, its relevance shines when dealing with properties boasting unique or specialized uses.

In the active space of real estate valuation, understanding and leveraging the cost approach becomes key for property owners and investors seeking to strengthen their vision and make conscious decisions in a competitive 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. These essential valuation concepts not only guide investors but also serve as significant stepping stones into a secure and informed space within the active realm of real estate investment.

By carefully exploring these foundational elements, investors ensure they are prepared with the insights needed to guide the competitive landscape effectively. These methods not only enhance understanding but also provide investors to make data-driven and strategic rulings concerning rental properties. As the real estate market continues to evolve, staying clear of these essential valuation factors becomes a powerful tool for optimizing investment decisions and boosting vision in the competitive rental property landscape.