You own a great piece of real estate, and you’re ready to start renting it out. This makes financial sense and is a smart way to generate incoming cash flow. But before you can start renting, you need to determine how much you should charge in rent. You can’t calculate this figure without knowing how much your Arden rental property is worth.
This guide will walk you through the process of determining your property’s overall value.
What Is the Current Market Value?
Unless you‘ve just purchased your property, the current market value is likely different from what you paid. There are two ways you can determine your home’s market rate.
Appraisal Value
Your first step is to look for comparable homes online. You can then estimate the current market value based on what the similar homes are listed and selling for. For a more accurate valuation, hire a property appraiser.
They will evaluate the home and consider several factors and features to give you the estimated fair market value.
- Location
- Age
- Size
- Market
- Amenities
- Improvements
- Current condition
Price Per Square Foot
Your second option is to calculate the home’s price per square foot. Look for homes that are comparable to your property. Divide the selling price by the property’s size.
The resulting number is the price per square foot. You can use this number to multiply with your home’s square footage to find its value.
Calculate Your Rental Rate
With your property’s market value in hand, you can calculate the ideal rental rate. It’s typically a percentage of the value between .8% and 1.1%. If your property is worth $250,000, then the monthly rent should be somewhere in the range of $2,000 to $2,750.
To decide where in that range you should charge, consider your expenses. If you have a mortgage payment on the property, then the rent should be more than the monthly payment, so the property pays for itself.
You should also factor in additional costs, such as insurance, taxes, upkeep, and homeowner’s association fees. This ensures you don’t operate the rental at a loss.
Gross Rent Multiplier
If you already charge rent for a property, you can use your monthly rental rate to determine the value. Multiply the monthly rent by twelve to get the yearly revenue. Then divide the total property’s value by this number.
If you charge $1,000 a month for rent, that’s $12,000 yearly. If your property value is $100,000, then you divide 100,000 by 12,000 and get 8.3.
This number represents the number of years it would take for the property to pay for itself in gross received rent. You would compare this to similar properties in the area to determine if your property is a good investment. The lower the number, the better the investment.
Cap Rate
This method of evaluating real estate shows the property’s potential rate of return. To determine your rental’s cap rate, you’ll subtract yearly expenses from the annual rent. Expenses will include items like management fees, property taxes, and repairs.
The resulting number is your net income. Divide this by the purchase price to find the cap rate. As a general rule, the lower the cap rate percentage is, the lower risk that property investment is.
Determine the Value of Your Arden Rental Property
As you can see, there are several ways to determine the value of your property. The method you choose will depend on what answer you’re seeking.
The current market value can tell you the value if you plan to sell the property. The gross rent multiplier and cap rate will help you determine the property’s long term rental value.
Contact our knowledgeable and experienced team today and let us help you determine the value of your Arden rental property.
