Rental Property Valuation - Analyzing an Investment Property

Rental Property Valuation - Analyzing an Investment Property


Despite the sluggish market, it is still complicated to find a "steal" in this day and age. A good starting point for negotiations is often 20% below the list price, with a target purchase price of 10-15% below market value.

But even after your proposal is accepted and the property is under agreement, the property value still may be reduced via the appraisal and/or the home inspection.

For example, if the appraised value comes in too low, you may have to ask the seller to fiddle with the purchase price or make some other arrangement. Similarly, a deficient inspection report may force the seller to either make repairs or correct the price.

GENERAL PROPERTY VALUATION GUIDELINES

Rental property estimation is primarily determined by rental revenue, location, and condition.

bigger units with more bedrooms charge higher rent. So all else being equal, you'll choose properties with multi-bedroom units. An added advantage is that 2-3 bedroom units have a tendency to have a more settled tenancy. Conversely, 1-bedroom apartments tend to draw 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 mostly 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 standard target property will be older (50 years or more) and will have cosmetic deficiencies or simply look "worn-out." These properties can offer great value for your money. Conceptually, it's sort of the opposite of curb appeal.

COSMETIC VS. STRUCTURAL

General property valuation rule: cosmetic problems = good, structural problems = bad!

By "cosmetic," I'm referring to things like:

- Peeling or old paint
- Ancient carpet
- Wrecked light fixtures
- Scratched kitchen cabinets
- Torn vinyl flooring
- Accumulated junk or clutter
- An messy lawn
- Unkempt shrubbery
- Filthy siding
- Old appliances
- Weak bathroom fixtures & towel racks
- Old doorknobs
- Old outlet & switch plate covers
- Dented 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- Outdated electric (i.e., knob & tube wiring)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
- Mold

Note that I am not saying to keep away from all of these issues at all cost. Run the numbers to ascertain feasibility. If you can acquire a multifamily rental property on the cheap, then perhaps you'll be able to meet the expense of a new roof, an electric upgrade, or even mold remediation and still come out ahead.

It all depends on the buy price, your property valuation conclusion, your level of experience, and the strength of your stomach. Use my free inspection checklist to help show the way (note: I'll post it on my website).

PROPERTY VALUATION "SQUEEZERS" TO AVOID

And finally, here's a list of things that'll kill property value...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. 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.
- Properties that do not have separate utilities. 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.

Stay tuned for more info.

Al-Yassa Al-Mahi

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Al-Yassa Al-Mahi - EzineArticles Expert Author