During the early 2000’s, real estate sector investment shot up among average Americans, since they could conveniently find financing and minimal down payment options. That led to many Americans making handsome profits by flipping homes. However, this didn’t last long, ending in 2007 with The Great Recession, and making the real estate investment quite unprofitable.
Though, there are various real estate investors who have considered looking towards rental investments. There are no two thoughts about it that it is a fine alternative to a buy and sell approach.
But most of the real estate agents are unsure of how to go about valuing real estate rentals? Don’t fret! What are we for? We shall introduce you to some ways through which you can value rental property. Never forget, the value of a property is based on what the comparable homes that have been sold in the last 6 months.
However, with the rental property, it is hard to calculate the value just by comparing it to physically similar buildings. There is, as well, a need to take into account the rental income which gets generates from it in order to determine the true value.
Ways to Value a Real Estate Rental Property
Sales Comparison Approach:
This happens to be one prevalent method of valuing residential real estate. Herein, a comparison of similar homes sold or rented is made for over a specified period. This gives the real estate agents, the hang of potentially emerging trends.
However, sales comparison approach serves as a reasonable opinion, and not as an apt valuation tool for real estate. Additionally, it is a significant tool for investors or real estate agent to draw a comparative market analysis.
Capital Asset Pricing Model:
A comprehensive valuation tool for real estate, that brings to light the risk and opportunity cost as it applies to real estate investing. This approach focuses on the potential return on investment which shall be derived from rental income. It, then, compares it to other investments that have no risk or alternative forms of real estate investments. Moreover, this capital asset pricing model suggests building in these risks prior to establishing a rental pricing structure.
This approach lays emphasis on what is the yield of potential income in relation to the initial investment. Thus, the income approach happens to be used often for commercial real estate investing. It aims at determining the annual capitalization rate for an investment.
This approach states that property is only of that much worth, what it can reasonably be used for. Cost approach can be calculated by summing the land value and the depreciated value of any improvements.
Real estate investment is no more a trendy thing to follow. Given the Great Recession of 2007, the real estate sector has drastically changed. This has opened doors for real estate rentals, which are proving to be quite profitable. All a real estate agent needs to know is how to value real property. And if you are a serious investor, just take a look at the components from all of these valuation methods mentioned above prior to making a rental decision.