You can compare this figure with the one you are looking at, as long as you know its annual rental income. You can find out its market value by multiplying the GRM by its annual rent. Property valuation is the process of determining the fair market value of a property for sale. It is the price for which the property would sell if both the seller and buyer have reasonable knowledge of the relevant facts and are under no pressure to sell or buy.
Calculate the capitalisation rate by dividing the annual net operating income from the previous step by the purchase price or market price. The capitalisation rate for investment properties is typically between 5% and 8.5%. Compare the properties using the capitalisation rates to determine the best value. This is a quick and easy way for investors to assess whether or not buying a rental property makes financial sense.
Determining the value of a property for rental or investment purposes is different from determining what a property is worth with no income component. It involves assessing the sales prices of recently sold properties that are similar to the valued rental property and that are located in the same area (real estate comps). This calculation is useful for investors looking for apartment buildings and larger multi-family communities. If it is particularly complex to measure the net operating income of a given rental property, discounted cash flow analysis may be a more accurate alternative.
The income approach is another method that real estate investors should consider when valuing rental properties. What makes the CAPM useful, as you can see, is that it takes into account the risks of investing in rental properties. In the real world, it is highly unlikely that an investment in a rental property will turn out exactly as planned or as calculated by this rental property calculator. From a real estate perspective, the value of a rental property can be compared to similar properties recently sold in the neighbourhood.
Conversely, negative cash flow is the result of rental income not being sufficient to cover the owner's expenses for that specific property. To calculate the GRM, the value of the property (or the sales price) has to be divided by the annual gross rents of the property. There is no single correct method for evaluating an investment transaction; rather, experienced investors must perform several method calculations to analyse an investment transaction from multiple angles. When choosing which valuation model to use for a rental property, consider which will give the highest value.
Any property value calculation will require a working knowledge of key numbers, such as down payment, mortgage payment and interest rate, to name a few. Learning how to value a rental property is a great step in determining the viability of a rental property for sale. The advantage of using this valuation method is that it provides a quick estimate of the rental property's value.