Getting into the real estate business can be a great decision and you stand to make a lot of money, but only if you do things right.
The real estate market is complex, and it will take some work if you want to be successful. One of the many things you should do to help maximize your profits is rental valuations.
So what is a rental valuation, and how do they work? Keep reading to find out.
What Is Rental Valuation?
Rental valuation is a process that's used to determine the market value of a property. This can be done to determine either a fair sale or rental price. Your rent prices will determine your overall profit, so it's best to know how much you should be charging for any property you own.
You may want to do this with a property you already own, but investors often do it to determine if a property they're looking at is worth investing in. There are various approaches you can take, and some are more involved than others.
Sales Comparison Approach
This is one of the most common methods among appraisers and real estate agents. It involves comparing a property to other similar ones that have been sold or rented over a certain period. A lot of investors want this time frame to be quite long so that it takes emerging trends into account.
Similar properties will be found by looking at factors like:
- Number of bedrooms/bathrooms
- Additional features such as pools and decks
Capital Asset Pricing Model
CAPM is more in-depth and involves the concepts of risk and opportunity cost. It includes looking at the potential ROI from rental income in comparison to other lower-risk investments such as REITs or treasury bonds. If a lower-risk or guaranteed investment exceeds the ROI of a rental property, it doesn't make financial sense to invest in it.
This approach looks directly at the potential operating income of a property relative to the initial investment. It's calculated using the capitalization rate for the investment and often involves interest expenses on a mortgage. This method is mostly used for commercial real estate, so you may not want to use it for rental properties.
Gross Rent Multiplier Approach
The GRM approach is based on the gross income an investor can make each year from a property. This is a simple method, but it may not be the most accurate. It doesn't account for things like taxes, insurance, or other expenses, so this should be used more as a guide than an accurate calculation.
This is an estimation that's found by looking at the land value alongside the depreciation value of improvements. This is another method that's more appropriate for commercial real estate and you're unlikely to use it for a rental property.
Your Los Angeles Rental Property Valuation
A rental valuation can be a great way to determine if a property is worth investing in. It may be hard to know what the best approach to use is, but a professional property manager can help you.
PMI Los Angeles is a full-service real estate asset management company with almost 20 years of experience in the industry. Get your free rental analysis today.