If you want to calculate the value of your rental property, there are a few things you should know. Finding out how much your rental is worth is great for business.
Finding Out the Property’s Value
Before you can figure out how much you are able to charge for your rental unit, you should calculate the value of the entire property. The amount that it’s worth is most probably different than the amount you bought it for. You should conduct a few preliminary searches for similar properties in your area and see what they are going for. There are different online tools that you can use to estimate your home’s value, such as Zillow and Redfin, but you should probably contact a professional home appraiser.
Home appraisers are experts on real estate and take a variety of elements into account to make an opinion of value. These elements may include:
After considering these features, the home appraiser will give you an estimate of the property’s fair market value.
Another way of determining the property’s value is by calculating the price per square foot. You should look at comparable properties online and see what their selling prices are. Take the selling price of the similar property and divide it by the property’s size to determine its price per square foot. Once you’ve found that amount, multiply it by your property’s square footage to find its value.
Calculating the Rent Payment
Your unit’s monthly rent amount will depend on the property’s value. After calculating how much your property is worth, you can determine how much rent tenants should pay. Landlords usually decide on the monthly payment amount by calculating a percentage of the property’s value. Typically, that percentage is between 0.8% and 1.1% of the rental property’s value. So, for instance, if a property is worth $250,000, a landlord would charge between $2,000 and $2,750 each month.
Keep in mind that if you are renting out your property so you don’t have to pay for your home loan, the rent you charge should be at least equal to the cost of your monthly mortgage bill. Don’t forget to factor in an estimate of repair costs, taxes, homeowners association fees and insurance when you’re deciding what to charge. This will ensure that you rental business runs smoothly and profit is being made.
Also remember that you can’t just charge whatever you want. Some states limit what landlords can charge for rent, security deposits and late fees. For more information on this, refer to your state laws.
Gross Rent Multiplier
The gross rent multiplier (GRM) is a common way of calculating a property’s value by using its monthly rent amount. Multiply the monthly rent payment by 12, and divide the total property value by this figure. For example, if a home is worth $100,000 and it rents for $1,000 a month, the GRM would be 100,000 divided by 12,000 (monthly rent multiplied by 12), which is 8.3. The GRM is the ratio of a property’s value to its yearly rental income; the GRM represents the number of years that it would take the property to pay for itself in gross received rent.
The capitalization rate, commonly known as the cap rate, is a rate that helps in evaluating a real estate investment. Cap rates show the potential rate of return on the real estate investment. To find a cap rate, add up a property’s yearly rent and subtract expenses like property taxes, management, and repairs. This amount is the net operating income. Divide that NOI by the price to find the cap rate. For example, if a $500,000 property has $3,000 in rent a month and $13,000 in expenses and vacancy, its annual NOI would be $23,000 and its cap rate would be 4.6%.
There are many ways of calculating the value of your rental property and figuring out how much rent to charge. Take certain factors into account before deciding on which method to choose. It depends on what investors are looking for in a property and you want to make sure you get the highest value for your unit.