This morning I had a great coaching call with an aspiring new real estate investor. He was a wise young man that came prepared for our call and he had lots of really good questions…
I figured that if he wanted to know then perhaps it’s something that you may want to learn about as well!
His question was…
“Jeff, when I’m looking at all kinds of properties to buy how can I quickly determine what the value is”?
Here are a few ways you can quickly value a rental property:
Now keep in mind that this is a fast way to determine if the property is worth anymore of your time. You always want to do your full due diligence before any deal goes firm.
CAP Rates & Gross Rent Multiplier:
CAP Rates & Gross Rent Multiplier are two ways that are frequently used by real estate agents and real estate investors to quickly place a value on a rental property.
Let’s take a closer look at how you can use these evaluation methods and how you calculate the value…
Gross Rent Multiplier
Gross rent multiplier measures the ratio between your properties gross scheduled income and the list/sale price.
Gross scheduled income is the number of rental units in the property times there ANNUAL rent based on 100% occupancy.
Apply a fair value market rent to any units that are currently vacant.
Price is the list/sale price the seller wants for the property.
PRICE / GROSS SCHEDULED INCOME = GROSS RENT MULTIPLIER
How To Use The Estimated Property Value
Step 1: First thing you want to do is use a GRM ( Gross Rent Multiplier) for other similar properties that are in the same area that you are investing in. If you need help with this check with a local real estate agent and/or property appraiser that is well versed in rental properties.
Step 2: Apply this formula when you want to calculate an estimated value for the rental property that you are analyzing… and potentially buying if all goes well :-)
GROSS SCHEDULED INCOME X GROSS RENT MULTIPLIER = MARKET VALUE.
Let’s take a look at an example so that you can gain a better understanding of how this works.
Let’s say that you are looking at purchasing a four unit rental property in Niagara Falls and the property has a gross rental income of $48,000…
Next you want to determine the properties estimated market value based on the area's average GRM ( Gross Rent Multiplier). Let’s assume it’s 10%
Estimated Value: $48,000 x 10% = 4800 x 100 = $480,000
CAP Rate or Capitalization Rate.
Cap rate looks at the relationship between the properties value and its NOI ( Net Operating Income) for the current year.
NOI is all the properties rental income and any other income minus all the property expenses ( accept mortgage payments ) It is as if you paid all cash with no mortgage.
Market value is the list/sale price of the property.
NET OPERATING INCOME / MARKET VALUE ( LIST PRICE ) = CAP RATE
Now let’s take a look at how you can use CAP Rate to estimate the rental properties value.
Step 1. Determine what the CAP rate is for a similar property in your investment area. If you need help with this, reach out to a local real estate professional or book a free consultation call with me at www.jefferywoods.com and I would be happy to help you.
Step 2. Use the following formula to determine the estimated value of the property you are looking to buy.
NOI / CAP RATE = MARKET VALUE
Let's take a look at an example so that you can gain a better understanding of how this works.
Let's say that you are trying to figure out what the reasonable sale price or market value is for a small 4 unit property in Hamilton Ontario, Canada.
The property has a NOI ( Net Operating Income) of $37,000 and based on your research the average CAP rate in that area for a similar four unit rental property is 4%
Result: $37,000 / 4% = $925,000
Now that you understand how to use these methods to easily determine an estimated value on the property you want to buy I must warn you…
This is simply a first fast way to analyse your deal. You must do a lot more due diligence before you can truly determine if the property is worth buying.
NEVER rely on either of these methods to make a buying decision.
If you would like to dive deeper and learn more about how to properly conduct a full investigation on a rental property feel free to book a complimentary strategy session with me below.
Your real estate-based wealth coach,
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