Investing in real estate? How to Value Rental Property
If you’re new to the real estate investment market, your first question might be, “How much will this rental property cost me? But the more important question is, “How valuable is this rental property?
Knowing how to value rental property is the first step to identifying your potential return on investment (ROI). In this post, we’ll share four common methods used by investors and the agents who help them find and purchase fruitful rental properties.
Editor’s note: This post is meant for educational purposes and should not be construed as investment advice. HomeLight always encourages you to reach out to an advisor.
1. Sales comparison approach (SCA)
The sales comparison approach (SCA) is a widely used method for valuing residential real estate, making it particularly useful for real estate investors. This approach involves comparing a home to similar properties that have recently sold or rented in the same area.
The SCA takes into account sales data and property characteristics, such as the number of bedrooms and bathrooms, square footage, lot size, and unique features like pools, garages, or updated kitchens. This method helps investors understand the competitive landscape and determine a reasonable price for a property, as well as estimate rental rates. Using price and rates per square foot is a common metric in the SCA.
Sales comparison approach example scenario
Imagine you’re looking to invest in a rental property. The property you’re interested in is a three-bedroom, two-bathroom house with 1,800 square feet of living space. To use the SCA, you identify three similar properties in the same neighborhood that have recently sold:
Property A: Sold for $270,000, with 1,750 square feet
Property B: Sold for $285,000, with 1,850 square feet
Property C: Sold for $280,000, with 1,800 square feet
Based on these comparable sales, you can estimate the value of your property to be around $280,000.
If these similar rental properties in the area are renting at $1.10 per square foot, and your property is 1,800 square feet, you can estimate a rental rate by multiplying these figures.
$1.10 x 1,800 = $1,980 potential monthly rent rate
Your value estimates may need to be adjusted for differences in features or property conditions. For example, if your property has a newly renovated kitchen while the comparables do not, you might add value to your estimate.
