![]() The income approach is another popular method that allows real estate investors to examine the value of a chosen rental property. Therefore, this is not the most reliable method and investors need to undertake multiple other calculations for an accurate property valuation. It is important to note that each rental property varies from other rental properties in terms of expenses and upkeep. The gross annual rental income approach does not take into account the expenses of maintaining and purchasing a rental property. For instance, it does not take into account operating costs and expenses, such as insurance payments, property taxes, maintenance needs, and vacancies. However, this approach also has its won drawbacks. The gross rent multiplier approach provides an easy and simple formula for investors to examine the financial savviness of investing in a renal property. A lower GRM indicates that the rental property investment will be able to pay off its purchase price in a shorter time duration. If you’re examining the value of an investment property for sale, it is ideal to identify properties that have a lower gross rent multiplier, typically between 4 to 7. If you obtain a gross rental multiplier of 5, it indicates that the purchase price of the rental property is five times grander than the annual gross rental income it is capable of generating. Gross Rent Multiplier = Purchase Price / Annual Gross Rental Income It comes with a simple formula that is as follows: The gross rent multiplier approach is based on valuing the rental property on the basis of the rental income it can provide over a period of one year. You can use the Mashvisor rental property calculator for accurate valuation results. You will have to take into account the differences between the properties and make adjustments to the sales prices. It is important to note that no two properties are exactly similar, and therefore, you cannot obtain accurate evaluations solely on the basis of sales price. The comparison properties must also be located within the same neighborhood and housing market as your chosen property. The goal is to establish the current value of a rental property, and therefore, comparing it with older properties will not provide you an accurate estimate. It is important to choose real estate comparisons that have been sold as recently as possible. In order to undertake an accurate valuation, you will have to identify 3 to 5 similar properties that can be compared to the property you seek to evaluate. It requires the investor to examining the sales price of the recently sold properties that are similar to the rental properties within the same neighborhood. The sales comparison approach is the most common and popular method among investors to evaluate the worth of their chosen property. There are three main valuation methods discussed below for your reference. ![]() You can estimate the value of a rental property through multiple methods. For instance, distressed properties that are inching towards a foreclosure can be bought with significant discounts. It also allows investors to identify and benefit from property investments that are being marketed with listings below market value. The art of property valuation allows sellers to market their property with a fair and attractive price while investors can avoid overpaying. It is important to understand the value of a rental property to make strategic real estate transactions. This is primarily why it can be more challenging to establish the value of a property. Why is property valuation necessary? Unlike the stock market, where corporate stocks are traded day after day under similar rates, property transactions are less frequent, and each property has its own unique features and aspects. It basically refers to the selling price of the property should the buyer and seller come to an understanding over its condition and are not pressured to ensure a sale or purchase. Property valuation refers to the process of establishing the fair market value of a property that is being sold. What is Property Valuation & Why is it Necessary? In this article, we will walk you through the basics of property valuation, and help you understand how you can value your rental property. These include the return on investment, projected cash flows, rental income, and the market value of the property. ![]() There are multiple aspects that you need to consider and analyze as an investor before purchasing your chosen rental property. However, this investment requires pragmatic decisions, research and a diligent property analysis to understand how profitable your chosen investment is likely to be. Investing in a rental property is the ideal strategy to generate wealth in real estate and build a passive and reliable stream of income.
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