A simple method used to determine the value of rental income property is the "10X Gross Multiplier." It is a simple formula to determine value based on the yearly income.
A Comparable Market Analysis (CMA) is also used to evaluate the property and to find the average sold price per square foot. I like to use both methods when looking at the purchase or resale of a rental.
The above property has been a successful rental, so a multiplier of 10X gross yearly rent will help determine current value. I include this information along with my sold comparables to see if the two numbers are similar. *Please note: 10x gross may be an optimistic number in some regions with severely depressed home values.
Here is an example of how the "10X gross multiplier" works for a landlord buying or selling rental property:
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Rent is $850.00 per month.
$850 x 12 months = $10,200 gross rental income
Gross rent of $10,200 x 10 = $102,000.00 est. value for the rental property based on rent alone.
If the property is, lets say, 1200 sq. ft, the price per square foot for the rental becomes $85. (102,000.00 divided by 1200 sq. ft. = $85.00 per sq. ft.)
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Compare this price per square foot multiplier number to your market analysis of comparable properties. (see below)
For the buyer who needs a bank loan, the rental still needs to appraise - do a typical CMA (Comparable Market Analysis) with adjustments:
Adjustments need to be made for differences in subject property and comps, such as upgrades in the kitchen (-10000 appliances) or 2 car versus a 1 car garage (-5000 for extra garage stall). Make the comps as equal as possible to subject. If comps need repairs, add those to the value, (+6000 added to value of subject if comp in need of roof repair).
After studying the 3 best sold comps, take a look at the 3 best active comps to see what price per square foot they are being offered for. (To do this, take the price offered and divide it by the square footage of the house to get price per square foot.)
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Here is an example:
1200 sq. ft comp sold for $123,000.00
123000 divided by 1200 sq. ft. = 102.50 sold price per sq. ft.
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In a falling market, the active comps may be even lower priced than the most recently closed. These actives can sell and pull down values while in escrow, so look at the price per square foot offered in active listings so you don't list the subject property too high based only on sold comps. Neighboring comps will affect the value of a rental, no matter how much income the rental produces.
Sellers of rental property need to see all scenarios which will help them decide if they want to hold on to the rental until the market improves, or sell it now while rental property is in demand. Sellers need to keep in mind that many rental investors are cash buyers and want to see value in the price offered. The advantage of cash: "as-is" sale with no bank appraisal to impede closing. Aggressive pricing is recommended for a quick cash sale.
Buyers who want to invest in a rental need to find out current rental rates or rental history of a home and use the 10X gross multiplier to determine a fair offer price. If there is a tenant currently in the home, they must also prepare to start fresh with a new rental agreement once the home closes. Look in the classified ads to find out what other similar rental homes are charging per month.
Buyers who want to buy a previously rented home can use the market analysis to determine a fair market offer price at which the home will appraise and close, and possibly rent it out in the future.
*If the buyer does not wish for the tenant to remain, have the real estate agent write in the sale contract that the house is to be vacant at close, as the new owner becomes landlord of the previous tenants. The new owner may need to allow for an additional 30 - 60 days notice to vacate for the tenants currently in the home if they remain after close of escrow.
*The above information is based on my own experience and may differ from state to state. Please seek legal advice pertaining to landlord / tenant laws and property management issues.
If you are interested in finding property on the Central Oregon Coast, give me a call at 541-270-6758 and I will be happy to help. I can help you find property in Newport, Toledo, Seal Rock, Lincoln City, Waldport, South Beach, Nye Beach, Gleneden Beach, Depoe Bay, Siletz, Tidewater, Salishan, Roads End, Otis, Oceanfront, income rental property and land listings.
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