How to Calculate Your Rental Property Value

How to Calculate Your Rental Property Value

As the housing market continues to boom, so have rentals. A "buyer's market" where bidding wars are commonplace has either forced or enticed many to rent. This in turn has made the rental environment more competitive and volatile as well.

You may be wondering how these dramatic market swings have affected your rental property value. You want to have a solid sense of where your investment stands. With things changing so quickly every day, it can be difficult to know where to start.

Besides using an online property value estimator, there are a few basic formulas for calculating the market value of your property. Here are three methods to help get you started.

Sales Comparison Approach

One easy way to calculate rental property value is to look at similar properties sold or rented in the local market over a certain period. Real estate agents and appraisers often use this “sales comparison approach.”

One starting point for this method is to calculate the value based on the average price per square foot. You also might look at the number of bedrooms and bathrooms. Take into account garages, pools, fireplaces, or any notable features of the property.

Income Model

This method is often used in commercial real estate investing. It looks at the relationship between a property’s capitalization rate and its net operating income (NOI) during a set duration.

NOI is what you receive in rent minus operating expenses. The capitalization rate is the amount of income from the rental divided by what you paid for it. For instance, if you bought a condo for $200,000 and make $24,000 in rental income from it every year, the capitalization rate is 12 percent (24,000 divided by 200,000).

This model divides the NOI by the capitalization rate, which gives you the income-related value of the property. For example, if that same condominium has an NOI of $18,000 after taxes and maintenance expenses) the property has an income value of about $150,000 during that given year (18,000 divided by 12 percent).

This method is more precise than the sales comparison approach. Note that it does not consider things like the appreciation of the property over time.

Capital Asset Pricing Model

The capital asset pricing model takes into account risk and opportunity costs as they pertain to your property. It looks at the return on investment (ROI). That is a performance measure that calculates the amount of return relative to how much an investment property costs to own and maintain.

This model brings in different variables that affect the ability to rent or keep up the property. For instance, older ones will need more maintenance than newer ones. If it is in an area full of restaurants and nightlife, that will make it more desirable as a rental.

Find Out More About Rental Property Value

One move you can make that will alleviate the need to keep up with market trends related to rental property value is to hire a management company. They will have unique knowledge that will help you make a more precise estimation of your asset.

At Blue Ribbon Property Management, we pride ourselves on coupling hard work with innovation. We are one of the most respected leaders in the property management industry.

We can further guide you on making savvy moves with your rental property. Reach out to us today for a free market analysis and to learn about our services