Real Estate AnalysisHow to Value Rental Property: The Ultimate Guide by Alex Karani May 26, 2020May 23, 2020 by Alex Karani May 26, 2020May 23, 2020Buying rental property can be a great way to make money in real estate and build wealth. However, to make good investment decisions, you need to do a thorough investment property analysis to estimate how profitable the property will be. There are several things an investor needs to assess before purchasing a rental property, including the rental income, cash flow, return on investment, and property value. In this blog, we are going to focus on how to value rental property. Property valuation is the process of determining the fair market value of a property for sale. This is the price that the property would sell for if both the seller and buyer have a reasonable understanding of the relevant facts and are not under any pressure to sell or buy.Why Should You Value Rental Property?Unlike corporate stocks that are traded on a daily basis and are similar, real estate transactions take place less frequently and every property has unique features. This makes determining property value more difficult. Therefore, knowing the value of a rental property is very essential during real estate transactions.Property valuation helps you determine the right price to offer and avoid overpaying. It also helps you identify and take advantage of investment properties that are below market value. For instance, a distressed seller who needs to sell the property as fast as possible is likely to sell it at a discount.So, how do you estimate a rental property’s value? Well, there is no one way to do it. Here are the most common ways to value real estate.Property Valuation MethodsThe following are the 3 main property valuation methods for rental properties:1. Sales Comparison ApproachThe first option to consider when thinking of how to value rental property is the sales comparison approach. This is the most popular valuation method used by real estate investors to evaluate investment properties. It involves assessing the sales prices of recently sold properties that are similar to the rental property valued and located in the same area (real estate comps).For this rental valuation method to be accurate, you should identify 3 to 5 comparable properties that are as similar as possible to the property being valued. The sale date of the real estate comps should also be as recent as possible. Since you are trying to find the current value of a real estate rental property, older property sales won’t give you an accurate value estimate.Moreover, the comps should be located as close as possible to the subject property. This means that they should be in the same housing market and neighborhood.However, no two properties are exactly identical. Therefore, simply looking at the sales price of comparable properties is not enough to give you accurate results. You need to account for the differences between the subject property and the comps by making adjustments to the sales prices.The most efficient way to find real estate comps is to use Mashvisor’s rental property calculator. This tool will give you a list of readily available comps for any rental property for sale in the US, whether on Mashvisor’s platform or off-market.Mashvisor – Real Estate Comps Sign Up for MashvisorRelated: How to Do Comparative Market Analysis with a Rental Property Calculator 2. Gross Rent Multiplier ApproachThe gross rent multiplier is a method of valuing rental property based on the rental income that it can generate in a year. It is calculated as follows:GRM = Purchase Price / Annual Gross Rental IncomeFor instance, a GRM of 5 means that the purchase price of the rental property is 5 times larger than the generated annual gross rental income.When analyzing an investment property for sale, property investors should find properties with a lower gross rent multiplier (4 – 7). A lower GRM means that the rental property will take less time for it to fully pay off its price.This is a quick and simple way for investors to assess whether buying a rental property makes financial sense or not. The main drawback of this approach is that it does not take into account operating expenses like property taxes, insurance, and vacancies. The gross annual rental income does not factor in the rental property expenses. And as you know, rental property expenses will vary from one rental to another. Therefore, on its own, this method is not very reliable. Investors should use it along with other property valuation calculations.3. Income ApproachThe income approach is another method that real estate investors should keep in mind when looking into how to value rental property. It is used to determine property value by dividing the net operating income (NOI) of the income property by the capitalization rate (cap rate).Property Value = NOI / Cap RateCap rate is a property metric used to estimate the return on investment of an investment property regardless of the financing method. It is usually calculated by dividing the NOI by the property price. Cap rate estimates can easily be obtained from real estate comps. Cap rates are also automatically calculated by Mashvisor’s calculator.The advantage of using this valuation method is that it provides a quick estimate of the rental property value.Related: How Is Cap Rate Used for Evaluating a Real Estate Investment?The Bottom LineLearning how to value rental property is a great step to determining the viability of a rental property for sale. Before you enter into a purchase agreement, always make sure that you know the value of the investment property for sale.There are several ways in which an investor can determine the value of a rental property for sale. But which property valuation method should you use? Well, savvy real estate investors examine the components from each method to make better investment decisions.However, using Mashvisor’s calculator eliminates the need for all that work. Using this tool will not only help you determine the fair market value of the rental property you are evaluating but also other key real estate metrics such as cash flow, cash on cash return, cap rate, and Airbnb occupancy rate.To start your 7-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here. Start Your Investment Property Search! START FREE TRIAL CMAGross Rent MultiplierProperty ValuationReal Estate Comps 0FacebookTwitterGoogle +PinterestLinkedin Alex KaraniAlex is an entrepreneur and an experienced content writer focused on personal finance, business, and investing. For over six years, he has contributed to a number of publications, both online and print. When he's not writing or working, Alex enjoys reading, traveling, and the outdoors. Previous Post The Cash Flow Analyzer: A Must-Have Tool for Real Estate Investors Next Post Should We Expect a US Housing Market Crash 2020 due to the Pandemic? 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