Knowing how to value a rental property depends on the type of property. For instance, determining the value of an apartment building is different than determining the value of a single-family home.
For the purpose of this post, though, I’ll be talking about how to value a single-family rental property. Let’s get started.
For a single-family home, the sales approach is the primary method used when considering how to value a rental property.
The sales approach looks at how much similar properties have sold for to determine the value of a subject property. These similar properties are known as “comps” (comparables). Appraisers usually consider 2-3 comps that have sold within the last 12 months.
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Whether you’re on the selling or buying side, you should have a real estate agent pull comps for you to help determine the value of a rental property you’re either considering buying or selling. This analysis is called a comparative market analysis (CMA).
The 1% rule
The 1% rule isn’t a method used to estimate an “official” value of a single-family rental property, but it is a formula commonly used by real estate investors to decide if a rental property is worth purchasing.
The 1% rule states that monthly rent should be at least 1% of the purchase price. So, following the 1% rule, if you purchased a single-family rental property, you should expect to be able to rent it out for at least $500/mo.
The 1% rule is important to think about because, especially if you’re attempting to sell your rental property occupied with tenants under a lease, you can only sell your property to other investors. So, you want to put yourself in their shoes.
If you’re asking $90,000 for your nice rehabbed rental property, but you’re renting it for $700/mo., you’re going to have a tough time attracting interest from investors.
how to value a rental property: Final thoughts
While the cost approach and income approach are two other methods used by appraisers to determine value of real estate, the sales approach is the most recognized method for single-family properties.
If you’re considering selling your rental property, it’s usually best to have it vacant. Showing occupied rental property is more difficult since you have to coordinate with tenants.
Additionally, if the property is vacant, you are much more likely to attract the interest of owner-occupants.
If you’re trying to figure out how to value a rental property for a purchase, just be sure to ask pressing questions about the tenants (assuming it’s occupied) as you don’t want to have to walk into a situation where you’ve got to evict someone right away.