Know How You Can Determine Your Rental Property Value
Before getting into rental real estate, ambitious landlords and real estate investors must learn how to calculate rental income flow. After all, rental income cash flow is a rental real estate business's lifeline. But how do you determine the rental income of a property? Fortunately, estimating rental income flow is simpler than you would think.
Often investors, while investing in real estate, ask themselves, how much will be the rental property value? And what does it cost in investing? Though this is important when you consider purchasing a rental property, yet, you need to know that rents offer an increasing source of revenue and a steady way to make money. But, above all you forget to note before getting into the game of real estate rentals, how will one go about making the evaluations of the rental property.
Rental real estate is an excellent method to generate rental income and build wealth. But, first-time investors must understand how to research and pick properties. Buying your first rental property is a significant financial investment, so be sure you know what you’re doing. Acquiring rental income and revenue from your house is an undertaking. It not only necessitates the required repairs and modifications to make the property appealing to renters, but it also deduces a rental value that is in line with market sentiment. Though this is vital when considering acquiring a rental property, you should also be aware that rentals provide an expanding stream of cash like a consistent means to generate money. Above all, one should consider how one would evaluate rental income before going into the game of real estate rentals.
Because without knowing the value of the property, neither you would be able to charge the rent effectively, nor you will know how much property tax is to be paid. Thus, looking at this, I initiated to write on the top ways for the estimation of your rental property as property value not only teaches you how to estimate rate payable, but also property taxes laid upon.
So, what is rental income?
Rivers flow, energy flows, and blood flows – wouldn’t it be amazing if money flowed as well? Oh, but it does! The beauty of real estate investments in their rental income flow. If you’re not aware of the notion, rental income comes in every month without you having to work for it. It is generated by investments or assets that generate cash flow. That rental income is also known as passive income.
When you buy and keep a rental property investment, you generate rental income. Then, once a month (or quarterly, or yearly), that rental property investment pays you back the money. Therefore, rental property investors often do not want to sell because they want to continue receiving the continuous cash flow income.
Also, read How Much Is The Average Rental Income in Top Indian Metropolitan Cities.
For example, if you buy a stock, that will create money for you in the form of a dividend for as long as you possess it – that’s cash flow. Let’s imagine you buy a single-family house and, instead of sprucing it up and selling it, you decide to rent it out. You collect the rent and pay the bills, including the mortgage, once a month. You will earn if you purchase it at a reasonable price and manage it correctly (positive cash flow).
The purpose of rental income is to alleviate the concern of running out of money in retirement. Also, your rental income will flow like clockwork as long as you hold the asset. It’s also the least taxed kind of income. Finally, there is no waiting time – you can begin earning rental income as soon as you find a tenant for your house.
What are the best rental income properties in India?
Now that we understand what rental income is and its significance. Let us now see the best rental income properties for you to invest in in India to reap higher rental income.
Real estate in India has an untapped demand from millennials searching for co-living housing. It covers both the student community and migrant working professionals between the ages of 18 and 35. Millennials account for over 30% of India’s population, so if you’re wondering, ‘real estate where to invest,’ investing in co-living housing provides both demand and potential.
Also, read Trending Real Estate: Why Coliving Models Are A Hit In India.
The demand for rental housing is likewise big and more acute for the country’s low-income groups. Rental accommodation is the only choice for daily wage earners and migratory employees from the informal sector. According to government statistics, between 26 and 37 million households in metropolitan India live in informal housing. As a result, investment in India’s inexpensive housing market generates better profits.
Commercial real estate
Rental income is a significant component of real estate investments. However, commercial real estate outperforms residential buildings in terms of attracting rental income gains. Commercial properties are far more expensive than residential buildings in terms of initial capital needs. However, investors who wish to participate in commercial buildings but lack funds can now invest through fractional ownership. Also, the average rental income yield for commercial real estate properties is 6% to 10% per annum.
Also, read Residential Vs. Commercial Properties: The Rental Income battle.
The Tops Ways on How to Value Your Rental Property
● The Income Approach
The income approach is a popular method for the valuation of rental property. This approach is frequently used for rental spaces while investing in commercial real estate.
The method mainly focuses on the potential income for the rental property and relies mostly on the determination of the annual capitalization rate of an investment. This rate is the projected annual income and is calculated by dividing the current value of the property from the gross rent multiplier.
For example, if a building cost Rs 20 lakhs while purchasing and the expected monthly income from the rentals is Rs 40,000, then the expected annual capitalization rate will be –
=( 40,000*12 months ) / 20,00,000
= 0.24 or 24%
This is a very simplified model, and if applied in real estate, the concept can also be known as discounted cash flow.
● Gross Rent Multiplier Approach
This approach is also one of the common approaches used for the valuation of rental property. However, this approach is based on the amount of rent an investor can collect each year from the tenants.
It is a quick and easy way of measuring whether a property is worth investing in. This approach, therefore, considers any taxes, insurance, utilities, and any other expenses associated with the property.
Though the gross rent multiplier model seems similar to the income approach, it doesn’t use net operating income as its cap rate, and instead uses gross rent.
For example, say a commercial property is sold in the neighborhood for Rs 25 lakhs with an annual income of Rs 5,30,000. Thus, for the calculation of GRM or Gross Rent Multiplier, you need to divide the sale price by the annual rental income like-
= 25,00,000 / 5,30,000
Thereby, you can now calculate this figure to the one you are looking for, as long as you know the annual rental income of the latter. Further, for the prospective property, you can find out its market value by multiplying the GRM by its annual income.
However, if you find the value of the property to be higher than the one that was sold recently, i.e. Rs 25 lakhs, then it might not be a prospective property, and instead move on.
● Researching by the Comparable Units
Under this method, you need to research the rental prices for units similar to yours. And for this, you need to find out how much rent others are charging for the comparable units. You can also look around your neighborhood to find the current rate prevailing for the rental properties.
Further, you will be required to look for the units that match yours in comparison to the number of bedrooms, bathrooms, amenities, and location. At this moment, you can make a list of properties that are similar to yours and write down how much rent the owners are charging, and know the occupancy rates. Then, you can assess and know whether you can also ask for the same, or either more or less depending on the situations and the interpretations of your property to others.
However, for an acceptable valuation of your rental property, you can also find out how much it would cost to build a replica of the property at hand. Answering this question is very much related to the valuation of your rental property. Finding out the rental value in this way is known as the ‘replacement cost method’.
Under this, you need to include the purchase price of land, and the cost of the labor and materials, excluding any depreciation. This method is beneficial when it becomes challenging to identify the value of the property with the help of comparable properties.
● Contacting the Property Managers for Setting Rental Price
For determination of the rental value of the property, you can hire a property management team to oversee, and set out a reasonable rent that you can charge from the tenants.
Even if you have any financial problems, still, you can contact any local property managers and consult them about the rental prices. This is so because they often deal with the property showings, and thereby know what the tenant likes and doesn’t like. Also, they can tell you all about what the tenants will be willing to pay based on the location, size, and amenities provided on your property.
Further, you can connect to some well-known real estate agents who deal with rentals, as they have a keen understanding of the local rental price. Also, they are familiar with all the rental properties in your area. Thus, it makes them a qualified experts for the assessment of the positive and negative values of your rental property and helps in setting the appropriate rental price.
● Determination of the Property by Square Footage
Seeing from a real estate perspective, rental property is no different than any other surrounding owner-occupied houses, such as condos or co-operatives. Taking this in mind, you can value your rental property on the same basis as other homes.
For this, you need to consider the selling price and later divide it by the property’s size to calculate the price of the property per square foot. For instance, if 2,000 square foot property is sold out at Rs 30,00,000 in your area, and the price per square foot is Rs 1500. So, if your property is 2,050 square feet, then its value would be Rs 30,75,000, which is figured out by multiplying the 2,050 square feet by the price per square foot, i.e. Rs 1500.
● Housing Price-to-Rent Ratio
Further, the Price-to-Rent Ratio is also critical. It is somewhat similar to the income approach. To find the price-to-rent ratio, you need to divide the median home price by the average annual rent in a given area. For example, if the average price of the property in your housing market is Rs 20 lakhs and the property rents Rs 20,000 a month. In that case, the price-to-rent ratio will be-
= Rs 20,00,000/ Rs 2,40,000 ( i.e. 20,000*12)
The ratio measures the relative affordability of renting versus buying out a given housing market. Likewise, if the ratio is-
Fifteen or below, it suggests that it’s better to buy a house than to rent it out.
If it’s between 16-20, it suggests that it’s better to rent than to buy a house.
And, if it’s 21 and above, it suggests it’s better for renting than buying the house.
What can be a good ROI for a Rental Property?
For determining whether you’ve found a good deal or not, you need to divide the net annual income by the initial investment, and at this moment, express the result in the percentage form. According to the recent reports on the rental properties, the returns between 4-10 percent are reasonable for the rental property.
However, a rental property of ROI under 4% is not typically worth investment, and an ROI of over 10% is considered a good deal, indeed. Using realistic and conservative numbers in your calculation will give you a more reasonable view of your ROI on the rental property.
Further, you should be aware of the lower-end properties, which often look more promising on the paper rather than the mid-range and the high-range properties, but can have more frequent tenant turnovers, and high repair costs. The key here is to estimate the rate of high vacancies at a later time, and the repair costs, so that you can get an accurate picture of your estimated ROI and thus, don’t land up in disappointment when your initial investments don’t pan up.
But, how do I determine the rental value of a property?
Knowing how to do the math on the rental value of a rental property might make the difference between a profitable investment and a money hole. Even if the rental market has ups and downs, understanding how to evaluate your prospective rental income return on investment will help you better estimate your odds of success.
- Initial Investment: When estimating your expected rental income, you must consider your initial and ongoing costs. Your first investment would most likely comprise a down payment, interest rate, closing charges, and any repairs required to make the rental suitable for occupancy.
- Expenses: To assess whether or not becoming a rental property owner will be beneficial for you, you must analyze your rental income by evaluating your initial and continuing costs against your predicted rental revenue. A mortgage payment, homeowners association fees (HOA), taxes, and property maintenance are all continuing costs for rental houses. In terms of taxes, you must also ensure that you are aware of any tax breaks that you may be entitled to as a rental property owner.
- Market rents: Rather than basing your rent on your expenditures, you should research to see what comparable houses in the region are renting for and then adjust your rent appropriately. When assessing fair market rent, you should also take supply and demand into account. If there is a great demand, you may be able to charge a higher rent. If the home is already rented, you will have a fair sense of the annual rent. Otherwise, you may approximate this number using market rentals.
The Final Words
Therefore, determining the rental income of your property can help you estimate whether or not a property will provide a positive cash flow. However, market fluctuations or evictions can have a significant impact on your actual rental income. Therefore, finding reputable renters that pay their rent on time, follow the agreement, and take care of your property can increase your chances of making a profit. To conclude is to say, no one can predict the rental value of the property accurately. Yet, investors can overlook the components from all these methods of valuation, before making any investment decisions on the rental property.
So, learning these introductory valuation concepts can be seen as a first step to getting into the real estate investment game. Further, in finding out a property that yields the right amount of income, try to include, and co-ordinate these steps in the proper estimation of the value of the rental property.
Rental Property Value FAQ's:
You or rental agents can connect to some well-known real estate agents who deal with the rentals, as they have a keen understanding of the local rental price. Also, they are familiar with all the rental properties in your area. Thus, it makes them a qualified expert for the assessment of the positive and negative values of your rental property and helps in setting the appropriate rental price.
For this, you need to consider the selling price and later divide it by the property’s size to calculate the price of the property in per square foot. For instance, if 2,000 square foot property is sold out at Rs 30 lakhs in your area, and the price per square foot is Rs 20,000. So, if your property is 2,050 square foot, then its value would be Rs 41 lakhs, which is figured out by multiplying the 2,050 square feet by price per square feet, i.e. Rs 20,000.
Price to rent ratio is somewhat similar to the price to income ratio. To find the price to income ratio, you need to divide the median home price by the median annual rent in a given area. The ratio measures the relative affordability of renting versus buying out a given housing market. However, investors should avoid investing in having high ratios, such as 20 or more, as it signals a market which is more favourable for the renters.