This article discloses four methods real estate investors and analysts typically use to analyze rental property value fast (i.e., without a serious real estate analysis).
Prudent real estate investing requires far more due diligence then these methods suggest. Still, they do provide a good rule of thumb to help you roughly determine whether the asking price on one income property is in-line with other investment real estate with minimal effort.
Just bear in mind that the results are just a small part of a sound real estate analysis. All four computations must be examined as a whole and against a myriad of other factors. At best, each of these evaluation measures should be considered only as a first-glance analysis of the real estate.
Okay let’s look, starting with the methods you would use to measure property price then the property’s financial performance.
1. Price per Unit – This is a good first rule of thumb measurement of price because it’s informative yet easy to compute. You merely divide the price for the rental property by its number of units. For example, a 10-unit apartment building that sold for $800,000 sold for $80,000 per unit. The result requires a deeper real estate analysis, but you at least get a vague idea about rental property prices in the area.
2. Price per Square Foot – This also provides an easy computation to measure price. Just divide the property’s price by the square footage of its improvements (which typically can be gotten from the local tax assessor). For example, an income property with a 10,000 square foot building that sold for $800,000 sold for $80.00 per square foot. As before, you need to know more, but it’s a decent quick look.
3. Gross Rent Multiplier – This is a good initial measurement of the property’s financial performance because you can compute it in your head. Just divide the property’s price by its gross scheduled income. A property that sold for $800,000 with a gross scheduled income of $96,000, for instance, sold at a 8.33 gross rent multiplier. To have credibility, however, you need to know the property’s correct gross scheduled income, which might mean a telephone call to the previous or current listing agent. As a buyer, the lower the gross rent multiplier the better.
4. Cap Rate – This is a better financial measurement than gross rent multiplier (and far more popular) because cap rate accounts for the property’s operating expenses. The downside is that cap rate relies on net operating income; thus requiring you to obtain income and operating expense data to compute the net operating income, which then is divided by the property’s sale price to arrive at its cap rate. A property that sold for $800,000 and had a net operating income of $54,376, for example, has a cap rate of 6.8%. If you find it difficult to obtain data on sold properties, and therefore are unable to arrive at an average cap rate in your local market, consider asking the tax assessor, an appraiser, or qualified real estate agent what it is. As a buyer, the higher the cap rate is the better.
As stated, these four methods can quickly be computed with little more than a pad and pencil. Just be sure to use credible data. And remember, this is so you can do a quick real estate analysis. You might consider using quality real estate investment software for a complete real estate analysis.
Here’s to your real estate investing success.
