Conducting a property evaluation is a serious part of making the better investment decision possible. That is because not all rental property gives a similar yield to investors. At first glimpse, two properties may appear to be equal. But as the saying goes, looks can be spoofed.
By exactly valuing rental property, you can profitably scale up your investment portfolio of single-family rentals and ignore purchasing someone else’s mistake.
What is a Property Evaluation?
A property evaluation is a mathematics that real estate investors use to know the price of a property. Property evaluation can be conducted by investors using data on the property and market, by licensed inspectors, and by real estate brokers with a BPO (broker advice of value).
Numbers You Require Before Doing a Property Evaluation
Before you can start evaluating property rates, you need to gather some key financial information for your property evaluation:
- Hostage payment and whether or not the payment with property taxes and insurance.
- Down payment price which will vary based on the type of hostage loan and the investment strategy being used.
- Rental income including an allowance for vacancy and the price of rental cash flow left over after paying the hostage and simple operating expenses.
- Amount to income ratio which compares the median home amount to the median income in the market. As the ratio decreases, homes become more affordable to purchase, which means the number of next tenants could decrease as well.
- Gross rental produced which is measured by dividing the total buy amount of the house by the annual gross rent. The higher the rental produce percentage, the better the investment property could be.
- Capitalization rate (or cap rate) which measures the rate of return on a rental property and is calculated by dividing the net operating profit by the market price of the house. Because the cap rate does not factor in the cost of financing, it is simpler to make an apples-to-apples comparison of the same properties in the same marketplace.
- Cash flow which is the amount that is left over after all expenditure, including the hostage, has been paid and is generally measured on a monthly and annual basis. Negative cash flow happens when the price of expenses and debt service is greater than the price of rental payment gained.
Two Most Important Factors that affect the value of the property
You have probably listened to the saying that “real estate is all about location, location, location.” That is exactly true. But location is just one of the seven general factors that disturb a property’s price:
Property Size and Floor Plan
The amount per square foot is the most usual metric used to value residential real estate. It is necessary because even though you may also use financial calculations such as cap rate and ROI to evaluate the profit-generating potential of the property, your exit plan may call for trading to an owner citizen and no other investors.
Enhancement Made to The Property
Single-family tenants where the property owner has already made an enhancement can be a great deal for purchasers. That is because very some enhancement if any increases property price by the same amount as the money spent on the enhancement.