5 Ways for Valuing a Rental Property ....

_Rents provide a consistent source of income and an increasing source of revenue. But, before getting into the real estate rental game, how does one evaluate properties?

1_The Sales Comparison Approach

_One of the most well-known methods of valuing residential property is the sales comparison approach (SCA). It is the most common method used by evaluators and real estate agents to evaluate properties.

_This method simply compares similar homes that have sold or rented locally over a specified time period. Most investors will want to see a SCA over a long period of time to identify any potentially emerging trends.

_Price per square foot is a common and simple metric that all investors can use to determine how much their property should be worth. In other words, if a 2,000-square-foot townhouse rents for $1/square foot, investors can expect income in that range as long as comparable townhouses in the area rent for the same amount.

_Keep in mind that SCA is somewhat generic—each home has a distinct personality that isn't always quantifiable. Buyers and sellers have distinct tastes and preferences. The SCA is meant to be a starting point or reasonable opinion, rather than a perfect predictor or valuation tool for real estate. It's also a good way to compare houses that are similar in size.

So, it's not going to work if you're going to compare the value of the property you're interested in, which is 2,000 square feet with a garage, swimming pool, six bedrooms, and five full bathrooms, to another property that has half the number of bedrooms, no pool, and is only 1,200 square feet.

(In Dubai market you can find all the data in DXBinteract website)

2. The Capital Asset Pricing Model

_A more comprehensive valuation tool is the capital asset pricing model (CAPM). The CAPM introduces real estate investors to the concepts of risk and opportunity cost.

_This model looks at the potential return on investment (ROI) derived from rental income and compares it to other investments that have no risk, such as real estate investment trusts (REITs)

_In a simple word, if the expected return on a risk-free or guaranteed investment exceeds the potential ROI from rental income, investing in rental property simply does not make financial sense.

3_Annual capitalization rate

_This rate is the projected annual income from the NOI divided by the current value of the property. So, if an apartment costs 1,000,000 AED to purchase and the expected NOI is 80,000 AED, the expected annual capitalization rate is: 80,000 ÷ 1,000,000 = 0,08 or 8%

_This is a very simplified model with few assumptions. More than likely, there are interest expenses on a mortgage (if applicable). Also, future rental incomes may be more or less valuable five years from now than they are today.

4_Gross Rent Multiplier

_The gross rent multiplier (GRM) approach values a rental property based on the amount of rent that can be collected each year by the investor. It is a quick and easy way to determine whether a property is worth investing in. This is, of course, before any, insurance, utilities, or other expenses associated with the property, so take that with a pinch of salt.

_To comparison, look at the GRMs and rental income of other properties that are similar to the one in which you're interested.

5_The Cost Approach

The cost approach of evaluating real estate properties assumes that the cost of a property should be equal to the cost of building a similar property from scratch. The cost of building a real estate property includes the value of the underlying land and the value of site improvements and constructions, less the depreciation cost of the improvements.

In summary

_There is no single method for determining the worth of a rental property. Before making an investment decision in rental properties, most serious investors consider components from all of these valuation methods. Learning these fundamental valuation concepts should be a good first step toward getting into the real estate investment game.

_Then, once you've found a property that can yield you a favorable amount of income, find a favorable interest rate for your new property using a mortgage calculator. Using this tool will also give you more concrete figures to work with when evaluating a prospective rental property.