Arriving at rental property value estimates is important business for real estate investors and all others engaged in real estate investing. Because settling on the right value of rental property – whether as a seller or buyer – can be the difference between real estate investment profit and loss.
This is why rental property value estimates are regularly the result of extensive research and exhaustive real estate analysis that enable one to really dig into the property’s financial performance. Fair enough.
Nevertheless, it’s not always practical to do extensive number-crunching and sometimes all that is called for is a quick way to roughly estimate what a rental property price should be as a first-glance analysis based upon minimal data.
So in this article we’re going to look at four calculations you can quickly compute with little more than a pad and pencil when you want to quickly make rental property value estimates just to get an idea.
As you will see, all four methods require some knowledge about recent rental property activity in your local market. But that’s not too difficult to obtain – especially if you’re friendly with an appraiser or someone actively engaged with real estate investing.
It should also be pointed out that each of the four methods include two formulas. One that shows you how to calculate the measurement itself, and one that shows you how to use the measurement to calculate property value.
1. Price Per Unit
Price per unit concerns the number of rentable units the income property provides. It is a good way to make rental property value estimates because it’s informative yet easy to compute.
Price Per Unit = Asking Price / Number of Units
Property Value = Number of Units x Price Per Unit
2. Price Per Square Foot
Price per square foot concerns the building’s square footage. In this case, it can be either reflect the footage for the gross building area or the physical space that the tenant occupies (i.e., the units). Our formulas concern gross building area but it works the same when it applies to units.
Price Per Square Foot = Property Value / Square Footage of Improvements
Property Value = Square Footage of Improvements x Price Per Square Foot
3. Gross Rent Multiplier
Gross rent multiplier (or GRM) has long been used by real estate investors as a fast and easy way to make rental property value estimates. This method concerns the property’s financial performance (i.e., gross scheduled income).
Gross Rent Multiplier = Property Value / Gross Scheduled Income
Property Value = Gross Scheduled Income x Gross Rent Multiplier
4. Cap Rate
Cap rate (or capitalization rate) is the most popular (and perhaps the best) way to make rental property value estimates, but it does require financial data about a rental property that might be more difficult to ascertain than the data required for the previous methods because you would have to know a rental property’s net operating income to make the calculation – and that information may or may not be readily available.
Cap Rate = Net Operating Income / Property Value
Property Value = Net Operating Income / Cap Rate
All four methods provide a good way for you to quickly and easily make rental property value estimates. Of course you want to be sure to use credible data. So make a point of doing some research in your area and make some connections with appraisers or other real estate professionals that you can rely upon to provide you with credible data.
At the end of the day, though, your time and effort will reward your real estate investing objectives. So it would be smart for you to start doing some homework.
So You Know
ProAPOD Real Estate Investing Software solutions automatically make the calculations for all four methods and does post the results in the appropriate reports.