To become a successful investor, you must understand the costs, income, and expenditures that your investment property is generating. It would be best if you also had a clear understanding of your real estate value. Before making any decisions, you must value your real estate accurately.
Table of Contents - How to Determine the Value of Your Investment Property Properly?
However, calculating the value of the property is far from an exact science. It can be challenging to determine an actual value. And, even if you do, a seller or mortgage broker might come up with a different figure. Being an investor, you should aim to get the best number - one that sellers, brokers, and appraisers will agree on.
A reasonable valuation can help you optimize your returns, while a poor valuation can leave you paying too much and earning too little!
The Value in Understanding …. Value!
Your net worth is greatly affected by the value of your investment property. It can play a vital role while securing a line of credit or applying for a mortgage for another investment property. Once you have gone for the latest and correct valuation of your current investments, it will offer you the most accurate information to make informed financial decisions.
Even when you are getting ready to make your first real estate investment, an accurate and complete property valuation before purchasing will ensure that you make the best possible financial decision. The property valuation will assist you in estimating future income from a property and determining whether you are paying a reasonable price for it.
When it comes to liquidating current real estate properties, valuations are also helpful. You can use the value to correctly estimate how much money you can get out of a property by selling it or refinancing the mortgage.
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The Fundamentals of Property Evaluation
While there are various methods for determining the value of an investment property, there are a few fundamentals applicable across all valuation methods. The current property condition, upgrade history, and any existing damages are also accounted for. Don't forget about the claims that might be filed against it!
Any aspect of the property can be considered when determining its value. Although some factors are more critical than others, everything has either a positive or negative value. Do we need a new HVAC system at this time? Plus. Has water damaged your basement? Minus. Every home is a huge financial statement!
But what about the possibility of price appreciation potential? Intangibles are much more difficult to value. When it comes to evaluating, price appreciation does play a significant role. However, it is essential to note that price appreciation is often perceived secondarily to the property's ability (or lack thereof) to generate profits. What is known is more important than what is predicted.
How to Valuate Your Rental Property?
Various tools can be availed while establishing your rental property value. There are different applications for different devices used for valuation; hence it is essential to consider the benefits and drawbacks linked with each methodology. The appraisers and investors keep an account of the below methods to valuate the rental properties to ensure the best value of the property:
Sales Comparison Approach
One of the most common types of available property valuations methods is the sales comparison approach. It is among the most easily achieved technique too! This method involves comparing the given property against others, offering similar sales features in a similar market. Real estate valuators gain insight into the possible selling or rental rate of a given property by observing existing market dynamics using recent market transactions.
Capital Asset Pricing Model
It is one of the most comprehensive valuation tools. It evaluates the risk associated with a potential real estate investment. It determines it against its revenue-generating capability, unlike other risk-free investments, including index funds or government-issued bonds. When calculating the potential investment risk, the capital asset pricing model considers age, location, and property condition.
This method compares the amount of money needed to buy a rental property to the future passive income it will produce. Commercial real estate transactions are most often associated with this form of valuation. The income approach to real estate valuation is based on the investment's capitalization rate at its core. It accounts for interest costs, net present value, and inflationary/deflationary risks.
Appraisers determine the highest, cheapest, and most practical use for a piece of real estate in the cost approach method. As a result, it is most often associated with vacant land plots. Appraisers weigh the property's actual value against the depreciated costs of any changes required to calculate the valuation. The cost approach method considers the location, nature, and zoning of a property while determining its value.
It is generally guided to run the numbers on your property by availing at least a few of these models. It will provide you with a clearer understanding of true worth. It will also brace you for any numbers thrown at you by a lender, mortgage broker, or appraiser. You do not want your estimate to be drastically different from anyone else's, particularly before a transaction.
Understanding the Numbers First
Irrespective of the tool you are availing for the establishment of your investment property valuation, it is essential to gain a complete understanding of the current market valuation for your rental property, along with its ability to produce passive income for the future. A professional appraisal firm serves the best purpose while securing a comprehensive understanding of the current value of your investment, as well as its long-term prospects.
In the end, it is difficult to assign a precise dollar value to your property. In reality, it is likely to change on a daily basis. What you can do is have the broadest possible view of its value and then stay with this figure confidently while making investment decisions.
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