Investing in a Bellevue rental property can be a lucrative business, but it requires some knowledge to get the best return on investment out of your properties.
Do you know the value of your rental property? Whether you're looking to buy a new rental property or answer the question "how much can I rent my house for," today's topic will help you understand how to value a rental home. Our Bellevue property management team will also cover factors that can increase (or decrease) property values.
All Investment Types Have a Value
You've probably heard about the "value" of stocks and how that value can impact an investor's returns. The same concept applies to rental properties!
While maximizing rental income is an essential aspect of optimizing returns, a property's value helps determine how much you can charge for the monthly rent amount and impact your cash flow. However, since rental properties are long-term investments compared to buying and selling stocks based on daily market changes, a property's value is only part of making money in real estate.
Rental property owners must understand how property valuations and potential rental income work together to estimate how much profit they'll make from an investment. Using accurate real estate valuations can help you find the best properties in Bellevue or help you avoid potentially bad investments.
What Is Real Estate Valuation?
So, what does it mean to "value" a rental property (or potential investment)? A real estate valuation is a process to help investors determine the economic value of a property.
It's important to note that "accurate" valuations are important, but they can be challenging to determine. Since property markets are less liquid and transparent than the stock market, investors can find it difficult to obtain critical information to analyze a property's value.
What Information Do You Need?
Work with a Bellevue property management company to gather comps, market analysis, and other information you'll need to run valuation numbers and formulas. When finding the value of a property, you'll deal with:
- Net Operating Income (NOI). This is the potential earnings from the property after operating expenses—but before taxes and interest payment deductions.
- Capitalization Rate. This is the required rate of return on rental property investment, depreciation, or net of value appreciation.
We know these terms and calculations can be more detailed than many real estate investors want to dig into. Still, it's critical to partner with property managers who can run these numbers and advise you based on valuations and potential returns.
What Are the Valuation Methods?
With NOI and the cap rate in hand, there are several ways to find the value of a rental property. Work with your property manager to apply:
- Absolute valuation models to determine the present value of future incoming cash flows to find the intrinsic value of an investment property
- Relative value methods like the price-to-earnings ratio or price-to-sale ratio
The best property management experts understand that both types of valuation methods deliver a better range of possible values for a property.
Discounting Future NOI
One of the key real estate valuation methods is a formula based on discounting future NOI. This valuation calculation requires investors to know the NOI, required rate of return on real estate assets, the cap rate, and the growth rate of NOI.
To run this calculation, investors can work with a property manager to gather the most accurate numbers and analyze the value output.
Gross Income Multiplier
This formula focuses on gross income without incorporating operating expenses. Since annual operating costs can fluctuate from property to property, the gross income multiplier (GRM) assumes that similar properties in the area will be valued proportionally according to generated gross income.
The calculation includes vacancy rates to deliver a valuation that accounts for the time a property could sit empty during the year without generating rental income.
What Affects Property Valuations?
Ultimately, property valuations can impact your return on investment—but what affects valuations? Bad valuations can be a result of factors including:
- The property's location
- Poor maintenance
- High vacancy rates
- High operating costs
- Low rental rates
- And more
When using valuations to analyze a potential new investment, property managers can help you identify specifics about a property that contributes to a low valuation. While low property values aren't always a deal-breaker, the right property management expert can help you determine if a potential investment is overpriced without the income potential to generate the right returns for your goals.
Use a Property Management Company to Value Potential Investments
Real estate valuations are a powerful tool for investors looking to find the right property. However, it can be challenging to get accurate data and formulas without hiring an expert. If you’re considering buying a new rental property, call our team of experts at Real Property Associates today! We work with investors to help them understand current market trends and helpful information about whether or not a new property is a smart investment. Give us a call if we can help by providing an analysis of how properties could perform over time.
Find the numbers you need! Click to use our free Investment Property ROI Calculator.