4 Ways to Value a Property
There are four primary approaches a real estate investor can use to evaluate the potential value of a rental property.
- Sales Comparison Approach (SCA)
- Gross Rent Multiplier Approach (GRM)
- Cost Approach
- Income Approach
While no method is perfect, the rule of thumb is to use more than one approach on the same property to get a better picture of the value.
Sales Comparison Approach
The sales comparison approach (SCA), also known as “comps” or the price-per-square-foot method, is one of the most widely recognized forms of valuing residential real estate. The SCA relies on comparing similar homes that have been sold or rented locally over a given period of time. By comparing these homes, potential trends may emerge to identify a relative price value. These values are dependent on characteristics such as:
- The location and neighborhood of the home in regards to proximity to quality schools, parks, local transportation, major highway access and other notable elements
- The home’s features, such as the number of bedrooms and bathrooms, upgraded elements and neighborhood amenities
- The home’s age and overall condition
- The average price per square foot of comparable properties
Gross Rent Multiplier Approach
The Gross Rent Multiplier Approach (GRM) is one of the best ways to quickly calculate a property’s profitability margins compared to similar properties in the same real estate market. The GRM functions as the property’s market value ratio over its annual gross rental income. The formula is as follows:
Gross Rent Multiplier = Property Price / Gross Rental Income
What does that even mean, you may be wondering?? First, let’s compare two fictitious rental properties.
- Property 1 is valued at $200,000 and rents for roughly $2,000 a month.
200,000/24,000= 8.3 (GRM)
- Property 2 is valued at $150,000 and rents for roughly 1,000 a month
150,000/12,000= 12.5 (GRM)
The general rule is the lower the gross rent multiplier, the better a potential investment opportunity. All things considered, the GRM approach shows that the $200,000 home would be a better investment since it would take a shorter amount of time to pay off.
The cost approach values a property by determining what it would cost to rebuild if the home were demolished or the monetary amount to build a similar structure. The cost approach is based on the idea that buyers will not pay more for a building than it is worth to construct a comparable property. Therefore, the price of the land, the cost of building a similar property and any depreciation are considered.
The income approach allows investors to estimate the property’s value based on its potential income. Let’s face it…investors purchase rental properties for positive cash flow. While the income approach can be complicated and confusing for real estate professionals, there are two significant variables:
- The net operating income (NOI) refers to the property’s income after all expenses are paid.
- The capitalization rate (cap rate) is a percentage that indicates the rate of return that is expected to be generated on a real estate investment.
This approach is often utilized in commercial real estate with multiple renters.
Oak City Properties can Help
When choosing the best investment rental property, there are many strategies to maximize profit and time. These approaches aid in making the best possible investment decision and avoid “deals” that don’t make financial sense. Before entering into any investment property transaction, it is essential to have the property appraised by a certified appraiser or real estate agent.
At Oak City Properties, we’ve streamlined the experience of purchasing and owning investment properties through a trusted and reliable mindset built on decades of measured success. Our team of real estate and investment professionals is ready to help you manage your most significant assets through a hands-on approach that focuses on consistently generating results. Want to learn more about our commitment to effective real estate investing and property management? Give us a call at (919)-232-9222 or check out our website: www.oakcityproperties.com
Want to Read More?
Take a look at a few more blogs that may help with your real estate investment journey.
- How Much Does a Property Management Company Cost?
- Property Management: How They Can Help With Vacant Units
- Dos and Don’ts of Buying a Second Rental Home
- Tax Deductions on Multiple Rental Properties
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