How to Value Real Estate Investment Property?

Oct 17, 2023 By Susan Kelly

Going to make the best appraisal of your real estate investment building and want to figure out how much is it worth? No problem, we will show you how and give you the steps one by one. Real estate investing is among the critical investments because there are lots of cash flow involved, i.e., monthly cash flow for investors who have buildings available for rent by tenants who are paying on time every month without any problems. So let us check out what are things should be considered while figuring out the value of a real estate investment property:



1- Location


Location, location, location! Real estate properties can be located anywhere in the whole world. Still, this fact does not change that being close to the main area makes it easier for potential tenants or buyers to be more attracted to your property.


2- Improvements made


When you have just purchased a real estate property, you must improve by providing better insulation, a modernized kitchen, etc. These improvements are likely to increase the value of properties, making potential tenants or buyers feel good about living there.


3- Amenities available in surrounding areas


Amenities refer to hospitals, schools, grocery stores, etc. whether any amenities are available within close proximity of your investment building plays an important role while evaluating its value. And keep in mind that prospective renters will not expect low rental prices if no fun activities are available near your property's location. This is why you should always try improving the surrounding area before finalizing the value of your investment property.


4- Maintenance costs involved


Another important factor you should consider while evaluating real estate investment property is the maintenance cost. It greatly influences the cash flow of tenants or buyers who live in your building. If they have to pay more for maintenance, then they may not be able to afford it, which will not only decrease their cash outflow but also decrease the value of your properties.



5- General area and competition-related information


Keeping the general area and competition information is equally important while figuring out how much a real estate investment is worth because other similar properties can affect its resale price. Therefore, you should always try getting some market analysis done before finalizing any such decision so that no misconceptions occur while evaluating the value of your investment building.


6- Cash flow and net operating income (NOI)


These figures represent what you can expect in terms of monthly cash flow from the property after accounting for mortgage payments, vacancy rates, and all other expenses associated with owning a rental property. In addition, you can calculate NOI by using the Rent vs. Buy Calculator. The calculator will help you decide whether it makes more financial sense to rent or buy a home by comparing how much money you could save by renting versus investing in real estate.


7- Net realizable value


This is an accounting term that determines the likely selling price of an asset when it's time to sell. In this case, you would assume that you'll be able to sell your property in one year for a pre-determined amount. You can find what that dollar figure is by taking your yearly NOI and dividing it by the cap rate -- the rate of return a buyer would expect from a real estate investment property with similar characteristics as yours. A cap rate typically falls between 5% and 10%, depending on market conditions and property type. However, most experienced investors use 8%. For example, if your property produces $10,000 per year in cash flow, it would be worth $100,000 if the cap rate were 8%.


8- Capitalization rates (cap rates)


The cap rate is another important factor to consider when determining the value of your property. You can use NOI to Cap Rate Calculator to determine the approximate value of your rental property by plugging in an estimated annual NOI and assuming a certain market-appropriate capitalization rate (or cap). Keep in mind that these are just estimations. They help you get within the ballpark range of what your property is probably worth right now; however, no estimation is perfect. A good rule of thumb is to assume that there's always at least 15% less value than what your invested dollars would indicate.


The formula for finding your property's estimated market value is as follows:


Property Value = NOI/((1-Tax Bracket) x (100% - Expenses %)) (market cap rate).

Related Articles