Buoyed by limited housing and a growing population, the average rent in Austin rose by 22 percent last year. For investors and property owners, understanding how that affects their rental valuation is critical.
If you own a rental property, read on to learn how to conduct a rental valuation. We'll break down the process into easy steps.
Gross Rent Multiplier Approach
This approach values rental properties based on the income generated rather than the property price. For Austin-based property owners, this is a great tool for evaluating how quickly rents change.
The GRM formula is easy to use. All you need to know is the property price and gross rent. Take the property price and divide it by the gross annual rental income.
The resulting number is known as the gross rent multiplier. As a general rule, the lower the gross rent multiplier, the better investment you have. The GRM, however, does not take into account operational expenses.
Income Approach
The income approach, also known as the cap rate approach, is great for taking into consideration future income. The first step requires that you calculate the net operating income of your rental property. Do this by subtracting operating expenses from your rental income.
Your rental income should include all income that your property is generating. This includes monthly rent plus things like appliance rent. To find the cap rate, take your net operating income and divide it by your property value.
Cost Approach
Another great way to evaluate your turnkey property is to value the property based on the cost to rebuild that very same property. Assume your rental home has 1,500 square feet. To build that home from the ground up, an investor would multiply the number of square feet by the average price to build a home in that area.
The cost approach works the same way. Find the median price for building a similar home and multiply that by the square footage of your current property. For older homes, you can factor in depreciation.
Sales Comparison Approach
This last approach looks at recent sales of similar properties in the same area. These are known as "comps" or comparables. Start by compiling data on the subject property. Research estimated property values using online tools like Zillow Zestimate.
Search recent sales of similar homes. Then review and compare the comps to the subject property to see what the fair market value of your home is.
Learn More Tips About the Rental Valuation Process
Each rental valuation method described in this blog can effectively be used to determine what your home is worth. If you have further questions, Homeriver Group Holdings is here to help. We are a full-service property management company based in Austin, Texas.
We offer a wide range of resources for property owners as well as rental properties for tenants. Whatever your property owner needs, we can help you sustainably grow your business. Contact our team today to learn more.
