How to figure out what your rental property is really worth

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There are four primary methods a real estate investor or agent can use to evaluate the potential value of a rental property. No one method is perfect. Each is a rule of thumb; if buyers or agents use more than one on the same property, they can get a better picture of its value.

 

Different appraisal techniques may be more useful for different types of properties (such as an apartment building versus a single-family home) and different types of stakeholders (such as a family, a retail investor or an insurance company).

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“What makes investing in single family homes unique is its flexibility in the event you want to sell your investment,” says Leo Sanchez, Mynd’s head of institutional single family residential acquisitions. “The potential buyer audience is much broader.”

 

That audience is essentially anyone looking for a property, whether it’s a family looking for a home or another real estate investor.

 

“If you buy an apartment complex,” Sanchez added, “the list of parties you could sell to is shorter because the criterion they use to evaluate the investment is strictly return on investment. Having multiple exit strategies is always advantageous.”

 

Before entering into any real estate deal, it’s essential to have properties appraised by certified appraisers or real estate agents.

1. The sales comparison approach (SCA)

The sales comparison approach (SCA), also known as comps or the price-per-square-foot method, compares a property to comparable properties that have recently sold in the area. It can be used for residential properties as well as investment properties since it does not take rental income into account.

 

“Even if you don’t know much about real estate, this method should be familiar and self-explanatory,” says Sanchez. “It’s typically referred to as an appraisal.”

 

Key characteristics used in the SCA include:

  • Location and neighborhood, including proximity to amenities like schools and parks, as well as to less appealing things like highways and overpasses
  • The home’s features, such as the number of bedrooms and bathrooms, and the presence or absence of garages, pools, decks, fireplaces, etc.
  • The home’s age and condition
  • The average price per square foot of comparable properties

For example, if similar homes sold recently in this neighborhood for between $160 and $175 per square foot, an investor would estimate a 2,000-square-foot rental property with similar characteristics would be valued between $320,000 and $350,000.

2. Gross rent multiplier approach

The Gross Rent Multiplier (GRM) functions as the ratio of the property’s market value over its annual gross rental income.

 

“This is really back-of-the-napkin math to see if you even want to double-click on a property before you begin itemizing the costs,” says Sanchez. “It tells you whether a property is in the ballpark you’re interested in.”

How to calculate the gross rent multiplier

As an example, a home with a fair market value of $200,000 that rents for $24,000 a year will have a GRM of 8.3:

$200,000 / $24,000 = 8.3

 

The GRM could be used as an estimate of how long it would take an investor to pay off a property based on rent income alone. In the example above, it would take the investor 8.3 years.

 

An investor could use the GRM approach to compare two investment properties, such as a $200,000 home that collects $2,000 in rent and a $150,000 property that collects $1,200. As in the example above, the $200,000 home renting for $2,000 a month has a GRM of 8.3. The $150,000 home would have a GRM of 10.4 ($150,000 / $14,400).

 

All other things being equal, the gross rent multiplier approach might suggest that the $200,000 home would be a better investment since it would take a shorter time to pay off.

 

The GRM doesn’t take into account any of the real expenses that come along with real estate ownership, such as property taxes or insurance premiums, which affect the investor’s actual income. To take those into account, investors can use the income approach.

3. The income approach

The income approach allows investors to estimate a property’s value based on the income it generates.

 

“This is Real Estate Investing 101,” says Sanchez. “Here, you’re being more specific about the costs of taxesinsurancevacancies and repair and maintenance to calculate a net return.”

 

The income approach uses two variables: the net operating income (NOI), which refers to a property’s income after all expenses are paid; and the capitalization rate, or cap rate, a percentage that expresses a property’s estimated NOI as a percentage of its market value.

How to calculate the income approach

Let’s say an investor finds a home that generates $24,000 a year in rent, with annual operating expenses of $3,600. So, the property will generate $20,400 a year. The current cap rate on single family homes is 5.5 percent.

 

$20,400 / 0.055 = $370,909

 

The property’s market value would be about $370,909.

 

“What’s unique about single family rental homes is that not everyone who is investing in the home puts much weight on the income it generates,” Sanchez explains, such as a buyer who might not be an investor. “They might just want good schools.”

4. The cost approach

In the cost approach, the value of a property is determined by what it would cost to rebuild the building if it was demolished or to build a similar structure. This approach is based on the logic that buyers will not pay more for the building than it would cost to construct a similar property today.

 

It takes into account the worth of the land the building stands on and any depreciation that has taken place.

 

“Insurance companies use the cost approach to determine if the replacement cost of an asset is in alignment with the value,” says Sanchez. “Institutional investors use this metric as a guardrail to ensure they’re not overpaying. They’re basically asking, ‘Is building new or buying existing properties better?’ and making sure the balance makes sense.”

How to implement the cost approach

As an example, an investor begins by using comparables to conclude that a similar plot of land is worth $40,000. She then determines that similar 2,000-square-foot homes cost $60 per square foot to build, or $120,000, and that this home has depreciated by 25 percent ($120,000 – 25 percent).

 

She then plugs these variables into the following formula:

 

Value of property = cost – depreciation + land value

 

In that case, the valuation calculation would look as follows:

 

Cost: 2,000 sq. ft. x $60 = $120,000

 

Depreciation: $120,000 x 25 percent = $30,000

 

Land value: $40,000

 

So, the value = $120,000 – $30,000 + $40,000, or $130,000.

Bottom line on evaluating a rental property’s value

Using a combination of these methods, investors can calculate the value of a property and determine whether it’s worth their time to investigate closely.

 

Before signing on the dotted line, investors should always get an evaluation of a property from a certified appraiser.

 

This article originally appeared on MYND.com and was syndicated by MediaFeed.org.

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The US city that Boomer homebuyers are flocking to

 

Baby boomers are the wealthiest generation of Americans alive today, according to the latest Federal Reserve data, and plenty are still looking to buy homes.

But where are baby boomers looking to buy? To answer this question, LendingTree analyzed mortgage purchase requests made in 2020 on the LendingTree platform across the nation’s 50 largest metropolitan areas (metros).

What LendingTree found was that baby boomers (defined as anyone born between 1946 and 1964) make up a significant portion of potential homebuyers in many of the country’s largest metros.

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LendingTree used generational definitions, from the Pew Research Center, to define the age range for baby boomers as being born between 1946 and 1964.

Metropolitan statistical area (MSA) rankings were generated by looking at the percentage of total purchase mortgage requests received by LendingTree from baby-boomer borrowers. The larger the share of requests from baby boomers, the higher ranking a metro area received.

Borrower data was derived from mortgage requests and offers given to users of the LendingTree mortgage shopping platform across the nation’s 50 largest metropolitan areas from Jan. 1, 2020, to Dec. 31, 2020.

 

bernardbodo / istockphoto

 

In general, baby boomers tend to have stronger financial profiles than those of younger generations, but that doesn’t mean that they don’t need to carefully plan before buying a home.

Here are some tips for baby boomers looking to buy a home:

  • Consider how it will impact your retirement. If you’re thinking about buying a house while you’re nearing or at retirement age, you’ll want to carefully consider how costs associated with that house will impact you when you’re no longer working. For example, if you pay with cash, ask yourself if you will be able to afford property taxes or other annual fees. If you decide to take out a loan, consider whether or not you’ll be able to make your monthly payments.
  • Look into different loan programs. There are many different loan programs that could be beneficial to you depending on your financial profile. For example, if you’re an older baby boomer you might be able to qualify for a retirement mortgage, which can help you get around income requirements that you’re likely to find with other loans.
  • Pay down your monthly debts. If you decide to purchase a home with a loan, lenders look carefully at your debt-to-income (DTI) ratio, the percentage of your gross monthly income that goes toward recurring debts. Maximum DTI ratios vary by loan program, however, so it’s a good idea to keep your total DTI ratio (which includes your monthly mortgage and all debt payments) at 43% or less. Even if you plan on paying with cash, it’s a good idea to pay off as much debt as you can so you have extra money for housing-related costs.

 

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2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

 

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  • Share of mortgage requests coming from baby boomers: 10.28%
  • Average baby boomer age: 62.5
  • Average credit score among baby boomers: 677
  • Average down payment amount among baby boomers: $45,644
  • Average requested loan amount among baby boomers: $224,083

 

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  • Share of mortgage requests coming from baby boomers: 10.38%
  • Average baby boomer age: 62.2
  • Average credit score among baby boomers: 689
  • Average down payment amount among baby boomers: $57,105
  • Average requested loan amount among baby boomers: $260,750

 

istockphoto/Vito Palmisano

 

  • Share of mortgage requests coming from baby boomers: 10.49%
  • Average baby boomer age: 62.3
  • Average credit score among baby boomers: 693
  • Average down payment amount among baby boomers: $97,495
  • Average requested loan amount among baby boomers: $423,968

 

istockphoto/shalunts

 

  • Share of mortgage requests coming from baby boomers: 10.60%
  • Average baby boomer age: 61.8
  • Average credit score among baby boomers: 685
  • Average down payment amount among baby boomers: $44,823
  • Average requested loan amount among baby boomers: $225,762

 

istockphoto/Mark Howard

 

  • Share of mortgage requests coming from baby boomers: 10.65%
  • Average baby boomer age: 62.1
  • Average credit score among baby boomers: 682
  • Average down payment amount among baby boomers: $34,531
  • Average requested loan amount among baby boomers: $173,498

 

 

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  • Share of mortgage requests coming from baby boomers: 10.67%
  • Average baby boomer age: 62.1
  • Average credit score among baby boomers: 667
  • Average down payment amount among baby boomers: $39,789
  • Average requested loan amount among baby boomers: $214,220

 

gabrieleckert / istockphoto

 

  • Share of mortgage requests coming from baby boomers: 10.84%
  • Average baby boomer age: 62.2
  • Average credit score among baby boomers: 674
  • Average down payment amount among baby boomers: $42,830
  • Average requested loan amount among baby boomers: $217.053

SPONSORED: Find a Qualified Financial Advisor

1. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes.

2. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

 

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  • Share of mortgage requests coming from baby boomers: 10.89%
  • Average baby boomer age: 62.3
  • Average credit score among baby boomers: 692
  • Average down payment amount among baby boomers: $58,762
  • Average requested loan amount among baby boomers: $282,576

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 10.92%
  • Average baby boomer age: 61.6
  • Average credit score among baby boomers: 662
  • Average down payment amount among baby boomers: $30,158
  • Average requested loan amount among baby boomers: $192,342

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 10.96%
  • Average baby boomer age: 62.6
  • Average credit score among baby boomers: 681
  • Average down payment amount among baby boomers: $41,749
  • Average requested loan amount among baby boomers: $209,718

 

istockphoto/Sean Pavone

 

  • Share of mortgage requests coming from baby boomers: 11.62%
  • Average baby boomer age: 62.2
  • Average credit score among baby boomers: 666
  • Average down payment amount among baby boomers: $34,208
  • Average requested loan amount among baby boomers: $180,679

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 11.63%
  • Average baby boomer age: 61.9
  • Average credit score among baby boomers: 671
  • Average down payment amount among baby boomers: $44,295
  • Average requested loan amount among baby boomers: $247,038

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 11.70%
  • Average baby boomer age: 62.6
  • Average credit score among baby boomers: 674
  • Average down payment amount among baby boomers: $40,399
  • Average requested loan amount among baby boomers: $213,417

 

DepositPhotos

 

  • Share of mortgage requests coming from baby boomers: 11.97%
  • Average baby boomer age: 62.1
  • Average credit score among baby boomers: 694
  • Average down payment amount among baby boomers: $48,934
  • Average requested loan amount among baby boomers: $239,478

 

SeanPavonePhoto/istockphoto

 

  • Share of mortgage requests coming from baby boomers: 12.12%
  • Average baby boomer age: 62.3
  • Average credit score among baby boomers: 676
  • Average down payment amount among baby boomers: $41,479
  • Average requested loan amount among baby boomers: $204,111

 

Sean Pavone / istockphoto

 

  • Share of mortgage requests coming from baby boomers: 12.46%
  • Average baby boomer age: 62.4
  • Average credit score among baby boomers: 685
  • Average down payment amount among baby boomers: $59,287
  • Average requested loan amount among baby boomers: $285,923

 

istockphoto/Chris LaBasco

 

  • Share of mortgage requests coming from baby boomers: 13.19%
  • Average baby boomer age: 61.9
  • Average credit score among baby boomers: 665
  • Average down payment amount among baby boomers: $38,683
  • Average requested loan amount among baby boomers: $226,908

 

eurobanks/ istockphoto

 

  • Share of mortgage requests coming from baby boomers: 13.20%
  • Average baby boomer age: 62.6
  • Average credit score among baby boomers: 702
  • Average down payment amount among baby boomers:  $91,017
  • Average requested loan amount among baby boomers: 4409,620

 

istockphoto / Jerry Uomala

 

  • Share of mortgage requests coming from baby boomers: 13.27%
  • Average baby boomer age: 62.5
  • Average credit score among baby boomers: 684
  • Average down payment amount among baby boomers: $43,025
  • Average requested loan amount among baby boomers: $218,010

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 13.73%
  • Average baby boomer age: 62.7
  • Average credit score among baby boomers: 683
  • Average down payment amount among baby boomers: $53,586
  • Average requested loan amount among baby boomers: $276,202

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 13.95%
  • Average baby boomer age: 62.8
  • Average credit score among baby boomers: 687
  • Average down payment amount among baby boomers: $46,364
  • Average requested loan amount among baby boomers: $219,520

 

Philip Rozenski / istockphoto

 

  • Share of mortgage requests coming from baby boomers: 15.26%
  • Average baby boomer age: 62.5
  • Average credit score among baby boomers: 697
  • Average down payment amount among baby boomers: $63,759
  • Average requested loan amount among baby boomers: $269,351

 

DepositPhotos.com

 

  • Share of mortgage requests coming from baby boomers: 16.36%
  • Average baby boomer age: 63.2
  • Average credit score among baby boomers: 693
  • Average down payment amount among baby boomers:  $54,342
  • Average requested loan amount among baby boomers: $264,800

 

istockphoto/Sean Pavone

 

  • Share of mortgage requests coming from baby boomers: 17.33%
  • Average baby boomer age: 62.9
  • Average credit score among baby boomers: 690
  • Average down payment amount among baby boomers: $41,341
  • Average requested loan amount among baby boomers: $196,524

 

Gabriele Maltinti / istockphoto

 

  • Share of mortgage requests coming from baby boomers: 19.97%
  • Average baby boomer age: 63.2
  • Average credit score among baby boomers: 681
  • Average down payment amount among baby boomers: $52,262
  • Average requested loan amount among baby boomers: $263,256

LendingTree senior research analyst Jacob Channel contributed to this report.

This article originally appeared on LendingTree.com and was syndicated by MediaFeed.org.

 

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