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Determining Rental Value Of A Home – Rental values are high, and if you’re renting a home in the greater Cleveland area, you’re in a good position to ask for more rent than you have in recent years.
Finding the right balance is an important part of the rental process. You need to price your home according to what the market demands. Then, you need to consider the unique offerings of your property, its general condition, and of course its location.
Determining Rental Value Of A Home
We share some of the best processes Cleveland real estate professionals use when determining the rental value of your property. You can use these strategies when you are pricing your own rental home.
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The market drives your rental value, ultimately. Before you can accurately determine the rental value of your property, you need to understand which houses are similar to yours for rent around the neighborhood.
Start with a comparative market analysis so you can find out how the local market values properties like the one you’re renting.
Many homes for rent are listed online, and it is enough to measure your home against the ones you find for rent today. However, remember that the numbers you find on rental websites don’t always give you the complete picture you need.
What you want to know are the houses that are recently rented. This type of data can be accessed through Cleveland property management companies. The rents you find on Zillow or Zumper are a good starting point, but better data leads to more accurate rental values.
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Everyone knows that location is important when we talk about real estate. These are all locations when we are buying or selling homes. Well, location affects the value of your rental property, too.
Why does location matter when it comes to pricing your rental home? This is important because tenants are willing to pay more for homes that provide:
Your rental value may decrease if your property is in a remote location that is hard to find or near a heavily commercial or industrial area. Expect your price to drop to find tenants faster. Other things that can drag down your rental value include a lack of parking, difficulty installing Wi-Fi or cable, a high crime rate, and a neighborhood that lacks sidewalks, parks, and grocery stores.
When it comes to establishing a rental value for your property, there isn’t much you can do about the market. You have no control over competing properties. Even the location is quite fixed.
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Well-maintained homes rent at higher prices than those that are old, deteriorating, and in constant need of repair. Tenants don’t want to live in a house where the walls have peeling paint and the furniture keeps falling apart.
Upgrades, updates, and renovations often contribute to higher rental values. Although it may seem expensive, choosing one or two minor cosmetic improvements is an easy way to increase the value of your rental. Try to make a difference in:
Improving the condition of your property will allow you to charge more in rent and remain competitive in the local rental market. Your home sets the standard for other properties, and you can increase rental values.
Your rental value is also important when it’s time to renew your lease agreement. As your date with your tenants approaches, decide how much you can charge when you offer a new lease. Most tenants will expect an increase of some kind.
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While anticipating your rent increase, you want to make sure you don’t make too much of an increase. You don’t want to shock your tenants into leaving the property and looking for somewhere else to live. You also don’t want to worry that it’s beyond their reach. Landlords usually don’t re-qualify tenants when they renew the lease, but do you think they have enough income to meet the higher rent amount?
Do your market research. Raise the rent to keep your property within the market, but leave some flexibility so your tenants are motivated to stay. They know that it is difficult to find a property for less. Explain to them that the renewal rate you are offering is a good value, and show them how many similar homes are available for rent.
Establishing a rental value isn’t always easy, and we’re here to help. Please contact us at Avalon Group Realty. We can help you rent, manage, and maintain your investment property in the Cleveland metro area, including Kamm’s Corner, West Park, Fairview Park, Lakewood, Parma, Parma Heights, Bedford, and Bedford Heights. There is a saying in real estate that money is made when a property is bought, not when it is sold. Before investing in real estate, knowing the value of a rental property is important to avoid overpaying for a home or knowing when to act quickly when the right deal comes along.
Let’s discuss the important difference between gross and adjusted rental income, then learn how to calculate property value based on rental income.
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Gross rental income is the total amount of money received from a tenant, including monthly rent, late fees (if any), and miscellaneous income from things like pet rent, parking, and application fee.
Note that a refundable tenant security deposit is not rental income unless part or all of the deposit is used at some point to pay for damages caused by the tenant.
When analyzing a rental property to buy or refinance, investors use a metric known as “adjusted rental income.” Adjusted rental income factors in a vacancy allowance to account for rental income lost between periods of tenant turnover because the rental property is typically unoccupied. 100% of the time, every year, with no days off.
The following example illustrates how to calculate gross rental income and adjusted rental income each year:
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The vacancy allowance of -$930 is based on a vacancy factor of 5%. In other words, let’s assume that the property is vacant for about 18 days per year (365 days x 5%) and then subtract the 18 days of lost rental income from the total gross rental income.
However, 5% is only an estimate used for this example. When calculating a vacancy allowance and adjusted rental income, investors typically look at a rental property’s vacancy percentage or consult with a local property manager if the home is vacant. still rented.
Let’s look at 4 ways to calculate property value based on income. Some of the following methods use adjusted gross rental income, while others use gross rental income to calculate the value of the property.
One of the many benefits of signing up for a free account with , a Roofstock company, is access to the Evaluation Tool.
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Calculates property market values and return metrics in real time based on key variables. The default valuation method provides an estimated market value Zestimate, based on Zillow’s proprietary formula.
Users can also switch valuation methods with just one click. Other valuation methods are the income/cap rate method and the gross rent multiplier (GRM) valuation method, described below.
Regardless of which valuation method is used, the value of the property is automatically updated on the real estate balance sheet to give an investor a more accurate idea of owner’s equity.
The income method formula values a rental property based on net operating income and a cap rate, or capitalization rate. Net operating income (NOI) is calculated by subtracting operating expenses from adjusted gross rental income, while the cap rate is calculated by dividing NOI by the property or purchase price:
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An investor can determine operating expenses based on a specific property’s history and expected future expenses, or use the 50% Rule if a property has not been previously rented.
The 50% Rule estimates what operating expenses are likely to be by multiplying adjusted gross rental income by 50%. For example, if the adjusted gross rental income is $17,670, the operating expenses must not exceed $8,835, and the NOI must be at least $8,835.
Note that NOI does not include any debt payments, contributions to a capital expense (CapEx) account, or non-cash depreciation expense.
Here is an example of how to use the income method to calculate property value. Let’s assume that similar rental properties in the same area are sold for a cap rate of 6%.
Guide To Gross Rent Multiplier For Investors + Grm Calculator
The gross rent multiplier (GRM) method of calculating property value uses gross rental income without factoring in operating expenses. While GRM may be a simplistic way to determine property value, it’s also a good “back-of-the-envelope” way to ballpark the property’s value based on gross rental income.
GRM is based on the concept that the more gross rental income a property generates relative to the purchase price, the better the property is valued, all else being equal. For example, if the property’s value is $162,000 and the gross rental income is $18,600, the GRM would be:
A GRM of 8.7 means that the rental property will generate rental income equal to the value of the property for 8.7 years, if the amount of rental income does not change.
As a rule of thumb, a rental property will have a lower GRM compared to similar rental properties of the same
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