The rental market is tight almost everywhere, including in British Columbia. According to data from Zillow, the average rent in Vancouver, BC is approximately $3,200 per month.
If you're a property owner, a thorough rental valuation can help you maximize your investment potential.
Read on to learn more about what a rental valuation is and how it can help you get the most out of your property value.
What is Rental Valuation?
Before we go in-depth about how to maximize investment property value, let's go over the basics. The concept of rental Valuation is simple. Basically, this important rental market analysis is a report that property owners use to determine how much rent they can charge for their property.
However, there are several factors that determine a rental valuation including location, property size, current demand, and more. Other factors like the condition of the property and special features may also play a role in individual rental valuations.
It's important to note that this type of real estate assessment is different from the kind you'd use for a single-family home. A rental valuation is utilized to determine the amount of money landlords can charge each month versus a single asking price. There are also several ways you can "run" a rental valuation to determine how much rent should be.
Income Approach
The income approach for rental valuation considers the net operating income, or NOI, for the property. This includes how much income the property generates when compared to the overall purchase prices. It doesn't take things like monthly mortgage and mortgage interest payments, depreciation, or repairs into account.
This valuation method uses the capitalization or cap rate approach, which is the percentage of return calculated by using a specific formula:
- Cap Rate = NOI / Property Price or Value
For example, if you expect to make $20,000 per year from a $175,000 home, you'd calculate the NOI or net operating income by assuming the operating expenses are around 36% or $7,200 of the annual income. This results in an NOI of $12,800.
Cost Approach
This rental valuation method is for rental properties when it's difficult to find recent sales of similar properties nearby. The premise of the cost approach is that an investor won't pay more for a resale property than they would for a new construction home.
The following formula is used for the cost approach:
- Value of Property = Cost - Depreciation + Land Value
Using the reproduction method, you'd value your rental property based on the same cost of reproducing the home using the same floorplan and materials. The replacement approach uses the cost of all new materials, a different floor plan, and other newer, high-end methods and materials.
Gross Rent Multiplier
The gross rent multiplier or GRM approach is one of the easiest ways to get an accurate rental valuation. All you need to do is device the current market value of your property or the purchase price by the gross annual rental income.
To do this, use the following formula:
- Gross Rent Multiplier = Property Price or Value / Gross Rental Income
If your rental home is worth around $175,000 and your annual gross rental income is $20,000, the GRM is 8.75. That number gives you a rough estimate of how many years it would take to pay off the property based on the income you generate from rent. In this example, you could expect to pay off the property in less than nine years based on the GRM.
How to Boost Your Investment Property Value
Now that you know the basics of rental valuation and a few ways to determine yours, there are some things you can do to maximize your investment property value. These tips will ensure that your property is rented for the maximum amount possible.
Improve the Curb Appeal
Having a nice curb appeal isn't just for home buyers, it's also a great way to get more interest from tenants to rent your property. Make sure your lawn and landscaping are nicely manicured and maintained to attract new tenants.
You can also make a few other simple changes like applying a fresh coat of paint to the outside of the home or installing new outdoor lighting. A nice, new door painted in a fun color is another great way to enhance curb appeal on a budget. Make sure the entrance to the home is well-lit, clean, and inviting to boost rental value.
Make High-Impact Upgrades
You don't have to do a complete home remodel to improve your property's rental valuation. Upgrading high-impact areas like the kitchen and bathrooms can make a huge difference.
Consider installing new, modern kitchen appliances and nice countertops, and update the bathrooms, too. Replace old, worn-out flooring with something new and durable like luxury plank vinyl to appeal to tenants.
Boost Energy Efficiency
Adding some energy-efficient features to your property can help lower energy costs and may also give you more wiggle room to charge more for rent since your tenant's energy bills should be lower. Installing a smart thermostat and smart, energy-efficient appliances is a great way to start.
Other options include improving insulation and replacing old windows and doors with new, double-paned glass for better efficiency. You can also install a tankless water heater or a ductless mini-split HVAC system to make the property as energy-efficient as possible while raising the value in the process.
Create an Enticing Listing
If your property has unique features, make sure you highlight them in the photos and the listing description to improve rental valuation. Perhaps your property has a great location close to amenities, or maybe it's packed with a plethora of smart home features.
Look at every aspect of the property and put the spotlight on the positives. Highlighting unique architectural elements or an abundance of outdoor space are other ways to boost the value.
Make Your Investment Work for You
Understanding how rental valuation works is the first step toward getting the most from your investment. With a few changes and upgrades, you can charge more rent every month to maximize income.
Axford Property Management is your trusted partner for your rental management needs, so contact us today to discuss how we can help you.