While Salt Lake City has seen a steady rise in property values through the first half of 2024, things are starting to swing back in the investor's favor.
According to RedFin, property value was down 6.4% year over year in August. This was the first time in several months that home prices have gone down in Salt Lake.
If you've been waiting for the right time to purchase a new investment property, now is the time!
However, there's still a possibility that any rental property you buy could have a rental income level below your expectations.
To avoid this, you need to perform a thorough rental property valuation. Luckily, this can be done without the need for real estate agents. Read on to learn how to do this.
How to Calculate Net Operating Income for Rental Property
Let's start with how to get a net income for your property. This part is simple. First, you get an annual rental income level. You calculate by simply taking the monthly rent for the property and multiplying it by 12. So if the monthly rent is $2,000, the annual income is $24,000.
Next, you subtract the yearly expenses such as maintenance costs, marketing, and property management fees. This part can be tricky but can be accomplished by consulting with your real estate agent or property manager.
Once that's done, you have an accurate reading on your expected return from your investment.
Three Common Rental Valuation Methods
Expert property managers have several methods that they often use for rental property-based valuation. You can find basic summaries of three of these methods below:
1. Capital Asset Pricing Model (CAPM)
A capital asset pricing model is a formula that demonstrates the relationship between an investment's return and the risk you need to take. It's often used for stock, but you can use it for a rental property valuation as well.
The Formula
Start with a risk-free rate (usually the Treasury bill rate) and an investment's beta or systematic risk. Multiply the beta by the expected rise in market value minus the risk-free rate. Add the beta multiplication result to the risk-free rate.
The answer will be the expected ROI percentage for the investment.
2. Sales Comparison Approach (SCA)
With the sales comparison approach, potential buyers will look at the value details of different rental properties to learn what price they should pay for a property.
As this method requires a lot of internet research, it's considered an online valuation method for rental property.
The details property buyers evaluate during this residential or commercial rental valuation are as follows:
Location and neighborhood
Recently sold listings
Property features
Age and condition
Considerations
Keep in mind that the SCA approach isn't a perfect residential or commercial property valuation method. The unique tastes of buyers and sellers can change the actual value of a property.
Also, make sure you compare rental properties that are as close to each other as possible. A five-bedroom house with a pool will not be worth the same as a two-bedroom house with no pool.
3. The Income Approach
This method is perhaps the simplest of rental valuations. It focuses on the potential rental income an investor could make relative to the price of their initial investment.
For this formula, you would first determine the annual amount you'll make from rentals. Then you divide it by the amount that you paid for the property. This will give you the percentage of the original property price that you'll make in a year.
An Example
For example, you might pay $150,000 for a property. A reasonable rent in the area is $2,000. Multiply that by 12 to get an annual rental income of $24,000.
Divide $24,000 by $150,000 and you get 0.16 or 16%.
4. The Gross Rent Multiplier Approach
The gross rent multiplier approach is similar to the income approach but perhaps even more straightforward. Rather than using your net income as the baseline, this approach simply values the property based on how much gross rent it pulls in each year.
While it is quick and easy, we suggest using caution with this approach and never using it as your only source of valuation. This doesn't take into account things like property taxes or operating expenses, you purely look at the gross revenue of a property against its property value.
This means you won't take into consideration if a property has serious renovation needs or recurring maintenance costs. While knowing the revenue you'll be pulling in is important, it's better to weigh this alongside other factors when judging an investment.
Property Management With Wolfnest
These are far from the only rental valuation methods you can use. But they should be enough to get you started. Good luck with finding the investment property of your dreams!
If you want assistance in picking the right rental property for you, we're here to help. Wolfnest Property Management is the premier company for property management and investment knowledge in Salt Lake City. We offer a free rental analysis on our services page to get you started.
Also, if you need help managing your property, you can get that help from Wolfnest. We are a competitively priced and highly responsive property management company. Contact us today with any questions!
