When investing in anything, you have to ask yourself loads of different questions before pursuing it. After all, you’re using your hard-earned money on something you expect will make you a profit!
This is the same when investing in property. Knowing the value of the investment property that you’re going to purchase is crucial. The rental game, in particular, is currently at an all-time high when it comes to income!
Before you hop into the real estate rental scene, you’re going to need to learn how to value your property. Here are four ways in which you can do just that!
Sales Comparison Approach (SCA)
This is the approach that you probably recognized as the most widespread form of valuing residential real estate. This is even used by appraisers and real estate agents whenever they need to evaluate properties!
It’s about as easy as it sounds. All it takes is a quick comparison between similar homes that have been sold or rented before locally over a specific time frame. The SCA heavily relies on characteristics such as the number of rooms, garages, driveways, pools, etc., to determine the property’s value.
The most common way to find the rental property’s value through this method is by price per square foot if a 3000 square foot, something similar to that should be expected to be priced similarly as well!
Capital Asset Pricing Model (CAPM)
This method is a lot more comprehensive than the previous. It fixates on the concept of opportunity cost and risk and applies it to investing in real estate.
The potential RIO or return on investment from the rental income is crucial in this model compared to other assets with little to no risk. To shorten it up, it means that if the investment placed on the rental income exceeds the potential RIO, it isn’t worth buying.
For the income approach, it relies on calculating the annual capitalization rate for an investment. Though you could use a rental yield calculator to conclude, a better way to calculate the quality is by dividing the rent’s annual income by the current property’s value!
Assuming that a market building costs $120,000 to buy and the expected monthly income from the rentals is $1,200, then the expected annual capitalization rate is 14,400 or 12%.
The cost approach states that the value of the real estate being sold is only worth what it can be used for. If you’re a hotel developer looking for three acres of land in an area so you can convert them into hotels, the value of your land will be based on the best use of the land itself.
If oil fields surround the land you purchased for the use of turning it into a hotel, the best use of the land is for drilling to look for more oil!
Knowing which method to use to value property can be difficult. However, there are loads of different videos and platforms that can help make that process easier. One of them is the Rethink Investing podcast that gives in-depth knowledge on anything under the radar of property!