Forty-two percent of homes in the Salt Lake City area experienced price cuts in 2022. Now is an excellent time to consider buying property in the city.
However, there's still a possibility that any property you buy will have a low ROI. To avoid this, you need to perform a thorough rental valuation. Read on to learn how to do this.
Three Common Rental Valuation Methods
Expert property managers have several methods that they often use for rental valuation. You can find basic summaries of three of these methods below.
1. Capital Asset Pricing Model (CAPM)
This 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.
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 this approach, potential buyers will look at the value details of different 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 rental valuation method.
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
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 that you compare 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 income an investor could potentially 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.
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%.
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.
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 using one of the methods on this page.