Key Takeaways Show
Any investor knows that performing property value estimations is a crucial aspect of making smart investment decisions. Using a good property value estimator, whether your system or an online tool, can help minimize confusion and errors that occur too often when making complex financial calculations. Below you will find a discussion of several approaches to property valuation estimations, including step-by-step guides on making those calculations. Read on to identify the best property value estimator for your investing niche. 8 Numbers For Accurate Property Valuation CalculationsAny property value calculation will require a working knowledge of key numbers, such as the down payment, mortgage payment, and interest rate, to name a few. Before sitting down to calculate property value, make sure you have taken the preliminary step in gathering the figures that are commonly required in these analyses:
[ Know your numbers! Download this FREE Cashflow & ROI Calculator for rental property investments. ] Methods For Determining Capitalization RateThe capitalization rate is a key metric when it comes to comparing potential investments. This is because the cap rate considers the costs incurred when owning a rental property and can provide a complete picture of the potential income a property could generate. While there are no clear standards for a “good” or “bad” capitalization rate, this number can be beneficial within the context of a particular investment. Luckily, there are several ways to determine the capitalization rate depending on the information you have available. The Band-Of-Investment MethodAccording to Investopedia, the band-of-investment method is best used for financed real estate investments, as it relies on properties’ interest rates. The formula for this method requires two main variables: the financing component and the equity component. The financing component refers to the lender’s amount of capital and can be determined by multiplying the mortgage rate by the loan to value ratio. The equity component refers to capital coming from the investor and is determined by multiplying the yield rate by the percentage of cash equity. Market ExtractionMarket extraction is perhaps the most user-friendly method for evaluating the cap rate of a given property. Investors who can calculate the net operating income should have no problem working with the market extraction method. Start by adding the total expenses for a property, including repair costs, taxes, insurance, fees, and vacancy costs. Next, take the annual rental income and subtract the total expenses (calculated above). Divide the resulting number by the total property cost. The final percentage is your capitalization rate. The Build-Up MethodThe build-up method is arguable the second most common way of determining the capitalization rate. Investors will need to start with the interest rate and then determine the liquidity, recapture, and risk premiums. This will be the most difficult part of the formula, though it can be done. Once you have identified these variables, add up the percentages for the cap rate. To learn more about calculating the mentioned premiums, check out this guide by Investopedia. [ Know your numbers! Download this FREE Cashflow & ROI Calculator for rental property investments. ] How To Evaluate An Investment PropertyThe following steps demonstrate how to evaluate an investment property using several of the eight commonly-used numbers identified above. There is no one correct approach to evaluating an investment deal; rather, seasoned investors should make several method calculations to analyze an investment deal from multiple angles. To get started, follow the steps below:
Calculating Property Value Based On Rental IncomeFrom a real estate perspective, a rental property’s value can be compared with similar properties recently sold in the neighborhood. However, this valuation does not take into account the income component. To estimate property values based on rental income, investors can use the gross rental multiplier (GRM), which measures the property’s value relative to its rental income. To calculate, divide the property price by the annual rental income. The GRM can then be utilized as a benchmark when evaluating comparable income properties. Variables When Calculating Property ValueThere are numerous calculations used when analyzing property value, each with unique variables involved. Finding this information can take a lot of time, and may be a challenge to find in general. A variable that is not accounted for when looking at your valuation models are large shifts in the real estate market. These shifts must be interpreted and forecasted on their own, thus adding another step to your real estate valuations. Many of these numbers can be hard to obtain or even estimate, especially at first glance. The process of calculating property value is complex; but that does not mean investors should just give up. Instead, be aware of the variability that can occur when analyzing a property. In time, these numbers will be easier to estimate and predict. Along the way, you will learn valuable skills on analyzing deals. When done correctly, this process will have a significant payoff as you decide which properties to add to your portfolio and which to pass on. What Is Multifamily Real Estate?Multifamily real estate is commonly thought of as apartment complexes, which can host more than one space to be rented out. There is a multitude of strategies when it comes to real estate investing. Still, when narrowed down to the category of residential real estate, there are two main types of properties: single-family and multifamily. As one might assume, single-family properties are designed to fit the dwelling needs of up to one family. As mentioned above, multifamily real estate comes into play when a property provides more than one rentable unit. Investors may choose to pursue the multifamily real estate investing niche due to the unique advantages it has to offer. Multifamily Property Value Estimator: A Step-By-Step GuideThe income method approach is widely agreed upon as the best way to analyze the value of a multifamily property. This method utilizes the net operating income (NOI) and the capitalization rate of the property.
How To Price A Multi-Unit PropertyFiguring out the current market value of a multi-unit property can be tricky, so most investors choose to borrow from the income method approach discussed above. To estimate property values in the current market, divide the net operating income by the capitalization rate. For example, if the net operating income were $100,000 with a five percent cap rate, the property value would be roughly $2 million. However, note that a property’s net operating income and capitalization rate can fluctuate from month to month, so this figure is only an estimate. Investors can also perform a local market comparison of similar multi-family properties in the area or calculate the price via the replacement method discussed earlier. Investment Property Value CalculatorIt should be apparent by now that there are several approaches to calculating property value, with each method requiring a working knowledge of key measures and calculations. Even the most seasoned property value estimator may feel challenged when making complex calculations while keeping track of measures that fluctuate over time. Luckily, investors can utilize an investment property value calculator found online. It is best practice to understand how to calculate property value based on rental income or using cap rate to calculate property value. Still, there is no reason not to make use of helpful tools that are made available. The Importance of Home ValueHome value is important as you consider purchasing any property, whether it’s a primary residence or investment property. The reason is that the value of a home essentially tells you how much it is worth. This number will influence all aspects of a real estate transaction, from raising financing to negotiating the final purchase price. In essence, the home value will help you determine the properties you can afford and the ones that are priced appropriately. The importance of home value also extends beyond the initial purchase of a property, as it can help you anticipate other expenses. For example, home value can help determine tax rates, insurance premiums, and even future refinances. Home value is also necessary for several property estimations. These numbers can give you a complete picture as you look at homeownership. How To Increase Property ValueThere are many factors that go into the value of your home. Location is a large factor in the value of your home, as well as the development of the area that your home is located in. As the area around your home develops and gets more shops, restaurants, parks, schools, etc., the value of your home goes up. While it’s hard to control the external factors that go into the value of your home, you do have control over your own property and what you do to improve it. Landscaping can provide a huge boost to your home value, as well as home improvement projects in and around your house. Every type of project has a different ROI, so before spending a fortune on upgrades you may want to do some research. Maintaining and keeping your house clean, working, and up-to-date will also help your home hold or increase in value. Finally, listing your home for sale at the peak of a seller’s market will inherently increase your property value by letting you sell it at the highest possible price. Hiring A Professional AppraiserHiring a professional appraiser is a great way to get a lot of information fast. You can have a property appraised both for its current value and for its value on specific dates in the past. On top of a valuation for the actual property, an appraiser will also evaluate the market around the property; which includes the region, city, and neighborhood of the property. Finally, a professional appraiser will give you information on comparable properties in the area. This information will include sales, current listings, prices, historical depreciation, and more. Getting an appraisal done by a professional is an efficient way to help you fast-track your real estate valuations. SummaryWhether choosing to utilize a property value estimator tool or make every calculation by hand, investors are sure to develop an appreciation for property evaluation. Property valuation estimators are critical resources that allow investors to identify the difference between good and bad investment deals. The property’s purchase price only scratches the surface in terms of the value a property has to offer, especially in the long run. Familiarize yourself with the above methods for determining capitalization rate, gross rental multiplier, and more; by practicing these calculations now, you will be better prepared to evaluate (and compare) investment opportunities when it counts. Don't invest without knowing your numbers! Click the banner below to download WealthFit's FREE Cashflow & ROI Calculator for rental property investments.
|