Even today, real estate is a safe and profitable investment. Despite everything, the purchase of an income property, small or large, remains a project that must be carefully considered.
Buying or selling a rental property is a major real estate transaction. As a buyer, but also as a seller, the importance of having the value of the property assessed by a professional should not be overlooked. How and why is what you will discover in this article.
Assessing the market value of an income property
Depending on the number of dwellings and the type of home appraisers near me property, two methods can be used to assess the market value of real estate: the comparable method and the income method. For small rental buildings, it is possible to combine the two approaches.
The comparable method
This method makes it possible to make a quick assessment of the market value of small buildings (less than 6 dwellings). As its name suggests, it consists of comparing the price and characteristics of the property for sale to those of similar buildings (between 3 and 10), recently sold in the neighborhood. Here are some criteria that can be compared:
- The number of floors.
- The number of rooms (in particular, bedrooms and bathrooms).
- The area (of the dwelling and the land).
- Amenities (e.g., basement, patio, garage, etc.)
The comparable method is used by both real estate brokers and chartered appraisers.
The income method
With this method, the market value of a rental property is assessed based on the net income it generates, compared to real estate market data. This analysis requires advanced knowledge in financial mathematics. It is therefore more commonly used to calculate the value of large buildings. For these calculations, the appraiser will consider in particular: the amount of rent, expenses, the vacancy rate, bad debts, etc. The appraisal will give rise to a report given to the client.
The ratios used to assess the value of a rental property
When it comes to evaluating the market value of a rental property, it is interesting to analyze the following ratios:
- Selling price per square foot = selling price/living area
- Selling price per piece = selling price/number of pieces
- Sale price per apartment = sale price/number of apartments
However, these are not the only calculations on which a real estate appraiser near me bases his estimate.
Indeed, three other indicators are essential for a complete evaluation, these being based on the ratios between the income generated by a building and its selling price.
- The Gross Income Multiplier (MRB)
The gross income multiplier is one of the few basic concepts that can be useful to master before embarking on a real estate investment. It is obtained from the following formula: sale price/gross income of the building.
First, it allows you to compare recently sold buildings in the neighborhood and thus determine an average MRB. Thanks to this average MRB, it will then be possible to calculate whether a sale price is in line with market prices.
- The Net Income Multiplier (MRN)
Calculating the Net Income Multiplier is like the Gross Income Multiplier. The only difference, as you will have understood, is that it is calculated based on net income, i.e., the sale price/net income of the building.
To obtain net income, various expenses are deducted from gross income, such as building management and maintenance costs, insurance, municipal taxes, etc. However, mortgage payments are not deducted from income.
The net income multiplier is used to assess the profitability of an income property. The ideal MRN varies between 10 and 16.
- The global discount rate (TGA – or capitalization rate)
The global discount rate makes it possible to measure the yield of a building and the expected return on investment.
Unlike the MRN, this time you must divide the net income by the selling price. And since it is a rate, the result must be multiplied by 100.
Example: net income $35,000 and sale price $415,000
TGA = (35,000/ 415,000) x 100 = 8.43 (net revenue/selling price) x 100
The higher the TGA, the better the net income/sale price ratio.
Factors that influence the value of an income property
Other factors can also impact the market value and profitability of a multiplex. They must also be taken into consideration before carrying out a transaction:
- Location: Is the neighborhood safe? What services are nearby? What is its development potential?
- The demand: Is this a coveted sector?
- Rents: What is the amount of rent and the vacancy rate in the neighborhood (or even in the building)?
- The tenants: Have the tenants been residents for a long time? Are the rents paid on time? What is the duration of the leases?
- The condition of the building: Is there a manager? How much are the maintenance costs? But above all, as with any real estate purchase, it will be important to have the building inspected by a professional to avoid unpleasant surprises.
Beyond the market value of the building, you must be interested in what this investment will bring you. To analyze the profitability of a building, a simple solution is to calculate the debt coverage ratio (CCD). This is the ratio between the expenses and the annual income related to the rental property (income/expenses). The minimum acceptable threshold is reached when the income generated represents 125% of the number of expenses.
Why assess the value of a rental property?
As with all types of properties, market value nationwide property and appraisal services becomes especially useful when a transaction is anticipated. It will be used by the seller to determine the selling price. In addition, he will have a report from his chartered appraiser that he can present to potential buyers. Having the value of a property appraised, if the seller has not already done so, makes it possible to ensure that you pay the right price, but also to complete your file to obtain financing.
The valuation of his income property is also interesting for the interests of an owner. This way, he can get an accurate idea of the amount of equity held. This information may be essential for tax procedures or to borrow against the net value of your property.
And the municipal evaluation then?
Having an income property appraised is a cost you would probably like to do without. You may be tempted to rely solely on the value indicated on the municipal taxes, but that would be a very bad idea! To understand why we invite you to read our article Market value and municipal assessment: not to be confused.
Are you looking for real estate experts?
Aipraiser can help you find a certified commercial real estate appraiser. By telling us about your project, we will put you in touch with the appropriate resource people, free of charge. Just fill out our form (in just a few minutes) and you can be put in touch with experts.