"Rental Property Valuation: How to Analyze Property Values"
rental property valuation is obviously a critical component of your investment strategy. Property prices are all over the board, so if you're a buyer then you'll have to conduct a
real estate analysis
to determine value. Very important, because if you overpay... you lose.
Despite the sluggish market, it is still difficult to find a "steal" in this day and age. A good starting point for the
real estate negotiation
is often 20% below the list price, with a target purchase price of 10-15% below market value.
But even after your bid is accepted and the property is
the property value still may be reduced via the
real estate appraisal
For example, whenever appraised values come in too low, sellers may be forced to reduce property prices or make some alternative arrangement. Similarly, a bad inspection report may force the seller to either make repairs or adjust the price.
GENERAL PROPERTY VALUATION GUIDELINES
Rental property valuation is primarily determined by
rental property income,
location, and condition.
Larger units with more bedrooms command higher rent, and thus have greater property values. So all else being equal, you'll want properties with multi-bedroom units. An added benefit is that 2-3 bedroom units tend to have a more stable tenancy. Conversely, 1-bedroom apartments tend to attract more of a transient population, which means the turnover is typically greater.
From a location standpoint, multifamily rental properties in older, lower-middle income neighborhoods usually offer the greatest bang for your buck. Plus, your tenant universe is typically larger in these areas. Avoid densely urban or very low income areas.
In terms of condition, the ideal target property will be older (50 years or more) and will have cosmetic deficiencies or simply look "tired." These fixer upper properties can provide great value for your dollar.
COSMETIC VS. STRUCTURAL
General property valuation rule: cosmetic problems = good, structural problems = bad! Structural issues will absolutely kill property value.
By "cosmetic," I'm referring to things like:
- Peeling or old paint
- Old carpet
- Broken light fixtures
- Damaged kitchen cabinets
- Torn vinyl flooring
- Accumulated junk or clutter
- An unkempt lawn
- Overgrown shrubbery
- Dirty siding
- Old appliances
- Decrepit bathroom fixtures & towel racks
- Old doorknobs
- Old outlet & switch plate covers
- Damaged mini-blinds
- Broken windows
- Any other "quick fix" you can think of
Structural issues, or issues where you must proceed with extreme caution, include:
- A severely cracked foundation or walls
- Galvanized piping
- Leaning chimney
- Outdated electric (i.e., knob & tube wiring)
- Severely sloping, cracked or warped floors
- Pervasive asbestos
- Rotting wood in the frame
- Lead paint
- A long-running leaky roof
- Buried underground oil tanks
- HVAC problems
Note that I am not saying to avoid all of these issues at all cost. Run the numbers to determine the feasible range of property prices you'd be willing to pay. If you can buy a multifamily rental property on the cheap, then perhaps you'll be able to afford a new roof, an electric upgrade, or even mold remediation and still come out ahead.
It all depends on the purchase price, your property valuation conclusion, your level of experience, and the strength of your stomach. Use my free
property inspection checklist
to help show the way (note: you'll need Adobe Reader...to download a copy, click here).
PROPERTY VALUATION "SQUEEZERS" TO AVOID
And finally, here's a list of things that'll kill property values...avoid them!
- Properties with serious structural issues or that are poorly constructed.
- Properties where all units are of the single-bedroom variety.
- Properties that show "economic obsolescence," such as those with very short ceilings, or those with many bedrooms but only 1 bathroom for example.
- Twins, condos, row homes, etc. The property prices on these types of structures usually do not appreciate as much as detached structures.
- Properties with wells and septic systems. These systems could create a lot of problems and added expense down the road.
- Property values are negatively impacted whenever the utilities are not seperate. I've literally seen tenants crank the heat up to 90 degrees F in the winter but leave the windows wide open. The only utilities you as a landlord should be paying are water and sewer.
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