Calculating the value of a rental property can be a little confusing and complicated. For a property owner there are three different methods of calculating a rental property’s overall value. The three methods of calculation are Sales Comps and Price per Square Foot, Gross Rental Multiplier and Cap Rate. Each method uses different data sets for calculation and therefore produces different results. Below is a brief overview of these three property value calculation methods, how they work and which method is the best for calculating the value of a rental property.
When you own rental property you are faced with decisions about increasing rent on your tenants. Many landlords resist raising the rent, however, due to fear of tenant reaction or vacancy. Landlords do have to balance the financial benefits of raising rent over keeping a good tenant who pays their rent on time and doesn’t cause any issues. Most landlords do not raise the rent on a whim and only do so when there are underlying reasons. Common reasons for raising the rental price include an increase in property taxes or utility costs, the need for maintenance or remodeling and/or changes in the local rental market.
With the price of housing skyrocketing in many areas of the country, wages not keeping pace with the cost of living and high student loan debt among Millenials; not everyone can afford to get into the real estate market at all let alone purchase a rental property. For those who can afford to purchase a property for rental purposes, there is the potential to earn a healthy monthly income because of the high demand for rental housing. Still, choosing the right rental property to purchase is important. It is advisable to perform a valuation analysis of real estate rental properties before making a purchase.