How should rental property owners value a potential investment? Keeping reading to learn a few tips from our Frisco property management team!
What Does It Mean to "Value" a Rental Property?
No matter how you choose to invest for future wealth, investments have value. That value helps determine the cost of an initial investment and your returns over time. Much like stocks, real estate investments have a value that can impact how much you pay for a property, the rent amount, and how much you could generate on the property's sale when it's time to move on from that investment.
Since rental properties are long-term investments, property value should be a critical factor when evaluating a property to add to your real estate investment portfolio.
Are High Property Values Good?
A property manager can tell you that high property values are a good sign of a thriving community and quality homes in many cases. However, inflated property values don't necessarily reflect the quality of the community or support positive returns for rental property owners.
Rental homes with high valuations often reflect a well-run community, good schools, and excellent city resources and programs. However, when property values are too high, investors can find it challenging to set a competitive rental rate that encourages renters to move into your home while also covering ongoing property expenses.
Are Low Property Values Bad?
In Frisco, property values are consistently competitive--but that doesn't mean investors can't find properties with lower home values. While it's not always a bad sign when a potential rental is in an area with low property values, this can be a sign to evaluate the neighborhood and look into why values are so low.
Low values could mean you can buy a property at a low sale price. However, make sure you won't be stuck with a home in an area where renters don't want to live! Low home values are often hand-in-hand with poor quality city resources, low-rated schools, and high crime rates.
However, just like high values don't always indicate a good investment, low values aren't always the sign of a bad investment. Work with Frisco property management experts to analyze a property's value and weigh it against the question of "how much can I rent my house for" and other critical factors that impact return on investment. Sometimes catching a property with a low valuation in an up-and-coming area puts you at the forefront of generating income before other investors get there!
What Do You Need For a Rental Property Valuation?
The valuation process determines the economic value of a potential investment property. If you're not sure how to run a real estate valuation, work with a property management company with access to the data and formulas you need.
Property managers consider these metrics when determining the value of a property:
- The capitalization rate for a property
- The Net Operating Income (NOI) to measure a rental's potential profitability compared to operating expenses
With these factors in mind, an expert with property management in Frisco uses two key methods to determine a property's value:
When discounting future NOI calculations, investors weigh potential income versus future operating expenses, including property management fees for the best property management services. This requires an accurate estimate of potential costs and a competitive rental rate that makes sense for the market.
The Gross Income Multiplier approach compares income for your property to others in the area, assuming that similar properties in the market will have a value proportionate to the gross revenue they generate. Since this calculation measures "gross" income, no operating expenses come into play with this formula.
When looking at real estate valuations, keep in mind there are no perfect methods to determine a property's value. Finding accurate information to use in these calculations can be challenging. Work with a property management company to find current data and apply these formulas when evaluating the value of a potential investment.
A Frisco Property Management Company Navigates Real Estate Valuations
Understanding the numbers behind your rental properties (or potential investments) is essential to finding success. From understanding different methods of valuing a property to knowing where to find reliable information on rental prices in specific areas, many steps must be taken before making an investment decision.
One key step for any investor should be working with a trusted property management company like RentHub! We help apply accurate formulas and data, so you know what's best for your portfolio. Reach out to us today if you want more info on how we help investors make smart decisions through our property management services.
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