How to Conduct a Rental Valuation

How to Conduct a Rental Valuation

The average rental price in the San Francisco Bay area is just over $2,000 a month. There is less than four percent of rental vacancy, so demand for rental properties is high in the area. 

Have you considered renting properties as a form of rental income? If you have, it's important to conduct a rental valuation assessment before investing. When investing, you estimate property value differently than if you were living in the home. 

Learn more about how to conduct a rental valuation below. And discover a few methods to figure out how much the rental property is worth. 

How Do You Conduct a Rental Valuation?

A rental assessment determines the economic worth of a property. It looks at the value of the property and the potential cash flow investors could earn from renting it out. 

There are a few different measurements that must be calculated to determine the rental valuation. First, you determine the net operating income. This is the expected revenue from the rental property minus any related expenses. 

Second, you must calculate the capitalization rate. The capitalization rate determines the expected rate of return on the investment property. To get the number, you must divide the net operating income by the current market value. 

Are you interested in partnering with a property management company to help with your rental properties? Check out the top 10 questions to ask before hiring a company. 

Property Valuation Methods 

Finding the rental value isn't a one-time calculation. While this is a great way to determine if it would be worth it for a passive income stream, it's important investors continue to evaluate the value. Market changes and deprecation impact the property's value on a continual basis. 

To determine property value, you can use a few different methods. Two popular ones are explained below.  

Gross Income Multiplier

In this method, the property price is divided by the gross rental income. This is a simple approach to finding out the fair market value. This calculation gives investors an idea of how long it will take to pay off the property based on projected cash flow.  

Discounting Future Net Operating Income (NOI)

This method factors in expenses but not taxes or interest. To get this number, you have to first subtract the NOI rate of growth from the required rate of return on the property. Next, you divide the NOI by the number you just calculated. 

Next, you divide the NOI by the capitalization rate. 

Then you take the NOI/Rate of return - NOI growth and subtract the second number. This is a more complicated method but gives a clear picture. 

Invest in Real Estate Today 

Now that you understand how to conduct a rental valuation to determine the rental property value, you are ready to decide if you should invest or not. Discussing your options with a real estate agent is a quick way to learn more. 

At Kenny Realty, we have helped many clients in finding out the value of rental property in the San Francisco Bay area. Allow us to share our expertise with you to help you on your rental journey. 

Contact us today to speak to an agent about your real estate options! 

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