What Adds the Most Value to Rental Property?
Rental property is a wise investment. However, its value varies significantly due to several circumstances. So, what adds the most value to rental property?
Comprehending property value is essential for securing returns. It reduces risks and directs purchasing decisions. Bloom Property Management London Ontario presents 5 ways to value a real estate rental property. It offers advice that all investors should be aware of.
Sales Comparison Approach (SCA)
Investors can determine a property's fair market value. Compare competitive homes that have previously sold or been rented in the same neighborhood.
Investors can have a better understanding of a property's comparative value. Examine features like the number of:
Bedrooms
Bathrooms
Garages or pools
Price per square foot
Capital Asset Pricing Model (CAPM)
CAPM considers opportunity costs and risk variables. It is the best option if you want to weigh risk against the expected return on investment (ROI).
In this case, risk-free assets are contrasted with the anticipated rental income, like:
Government bonds
Real estate investment trusts (REITs)
Rental property is unworthy if ROI is less than a risk-free investment. By contrasting possible returns with those of other secure investments, the CAPM enables investors to make more thoughtful decisions.
Read: 7 tenant responsibilities when moving out of a rental.
The Income Approach
The revenue approach is well-liked for evaluating rental properties, particularly commercial ones, because it concentrates on anticipated revenue from the initial investment.
The capitalization rate is the ratio of yearly rental income to property cost. It must be determined to use this strategy. For example, the capitalization rate is 12% if a $200,000 property brings in $24,000 rent annually.
This capitalization rate measures property worth, which investors use to determine whether rental income meets or exceeds investment objectives. It is a simple and efficient way to calculate possible income returns, which aids investors in identifying properties with promising rental income potential.
Gross Rent Multiplier (GRM) Approach
GRM approach is based on gross rental revenue. It offers a simple and rapid method of determining a property's worth.
GRM should be used in conjunction with other techniques. In contrast to the income approach, GRM does not account for interest or running costs.
The property price is divided by the gross rental revenue each year to determine GRM.
Read: Best places in Ontario for apartment rentals.
Cost Approach
The cost approach adjusts for depreciation and determines a property's worth based on the land and building costs. This approach is beneficial when assessing more recent homes or undeveloped properties.
This strategy performs well when the property's highest and best usage diverges from its actual use.
The Bottom Line
Learning about what adds the most value to rental property is not a child’s play. The real worth of a rental property cannot be ascertained by a single method. Instead, a more accurate image is sometimes obtained by integrating many ways. Investors can obtain a comprehensive grasp of a property's value by learning about the above 5 ways to value a real estate rental property.