If you’re planning on buying real estate, whether it’s for a rental property investment, business venture, or a new home, it’s important to know how to determine the true value. Knowing how much the property is worth can help you decide how much you should pay for it. Today, we’ll go over some of the basics of property valuation, how to calculate property value, and why it’s important for anyone buying real estate.
Contents of This Article:
- What Is a Property Valuation?
- What to Know About Calculating Property Value
- Main Types of Property Valuation
- Different Methods to Calculate Property Valuation
- Why Is Accurate Property Valuation Important?
- Manage Your Investment Properties With BMG
What Is a Property Valuation?
Property valuation is the process of determining a property’s worth. When you’re buying a home, apartment, land, or any other piece of real estate, you’ll want to know its value and the price you’ll pay to own it. That said, valuation considers factors like the property’s location, size, condition, features, and what similar properties in the area have recently sold for.
Whether you’re buying, selling, or renting a property, getting an accurate valuation is crucial to ensure you’re making smart and informed decisions. This information is also helpful for landlords and property management companies in Washington, DC, as it can help set fair rental rates. Today, we’ll review a few tips for investors, types of valuation, why it’s important, and methods to calculate property value.
What to Know About Calculating Property Value
Accurately calculating property value is crucial for investors. After all, knowing how to find different home values can influence investment strategies, potential profitability, and decisions regarding buying, selling, or renting properties. As such, investors must perform thorough research, gather necessary data, and conduct property investment analysis. Here are some tips for gathering real estate valuation data.
How to Gather the Right Data
- Network With Local Agents- Working with agents can give you firsthand market statistics and access to Multiple Listing Service (MLS) information.
- Utilize Online Platforms- Use different online sources, like Zillow or Redfin, to find real estate data, such as property listings, sales, comparable properties, and market trends.
- Join Groups and Forums- Finding real estate investment groups and forums to join can help find local market data and allow investors to share their investment experiences.
- Check Public Records- Public records can give you inside information about property sales, tax assessments, and deeds, which can help determine the value of a specific property.
What to Avoid While Gathering Data
- Not Using Accurate Sources- Old online data can be inaccurate or outdated, giving you the wrong information about a property or neighborhood. As such, it’s important to use reliable online sources to get the most accurate and updated real estate data.
- Ignoring Local Dynamics- Even in the same city, real estate markets can vary significantly. As such, you’ll want to pay attention to local dynamics.
- Overlooking Issues With the Property- Factors like property condition, legal disputes, or zoning changes can affect a property’s value, so it’s crucial for investors to look into any issues to get an accurate price.
- Neglecting Historical Data- Understanding current trends is most important, but historical data on a property can give you valuable information that can help with valuation.
Main Types of Property Valuation
Typically, investors who want to calculate property value consider these three methods of property valuation.
- Fair Market Value (FMV)- The fair market value (FMV) is the price agreed upon by a willing buyer and seller in an open market. It’s influenced by factors like location, condition, and market trends, which are crucial for determining a property’s worth.
- Assessed Value- The assessed value is the dollar amount assigned by local tax assessors to calculate property taxes. That said, it’s usually lower than the actual market value at which the property may sell.
- Appraised Value- A professional appraiser determines the appraised value and is the estimated worth of a property. This number is based on factors like size, location, condition, and comparable sales and is crucial for mortgage approval and influences loan terms.
Different Methods to Calculate Property Valuation
There are several different ways to calculate property value. Each method allows investors to get a sense of how much property is worth based on different factors. Read along as we review each valuation method below.
- Sales Comparison Approach
- Income Approach
- Cost Approach
Sales Comparison Approach
This method, also known as the market approach, determines a property’s value by comparing it to similar properties that have recently sold in the same area. That said, to find a property’s value, appraisers will look for comparable properties that are similar in size, location, features, and condition.
For instance, if three similar properties in a neighborhood sold for $260,000, $280,000, and $300,000, this approach might use the median price of $280,000 to calculate the value of comparable houses in that area. The sales comparison approach is helpful in determining how much buyers are willing to pay for similar properties.
Income Approach
The income approach calculates the property’s value based on the income it generates or how much it could generate. This method is commonly used for rental properties, commercial buildings, or other income-producing real estate. To find how much it may generate, you’ll want to do the following:
- Determine the expected yearly income from rent
- Subtract losses from vacancies or other factors
- Deduct costs such as maintenance, insurance, and utilities to find the net operating income (NOI)
- Find the cap rate, which is the rate of return that investors expect from the property
- Divide the NOI by the cap rate
Here’s an example of how it works.
If a rental property makes $60,000 annually from rent, there’s a 12% vacancy rate, and operating expenses add up to $10,000, the NOI would be:
NOI = $60,000 – ($60,000 x 12%) – $10,000 = $48,200
If your desired ROI is 10%, here’s how to find the property’s value.
Property Value = $48,200/0.10 = $482,000
Cost Approach
The cost approach estimates the property’s value by determining the cost of replacing it with a similar one. Essentially, it considers the cost of land acquisition and the cost of constructing a similar building. This includes labor expenses, construction costs, building materials, legal, and insurance costs.
For instance, if rebuilding a house costs $300,000 for labor and materials and the land is worth $40,000, then the property’s estimated value would be $340,000.
Why Is Accurate Property Valuation Important?
A property’s accurate valuation is crucial for successfully investing in real estate. After all, it impacts several aspects of your investment, including the following.
- Your Potential Return on Investment (ROI)
- Purchase Price of the Property
- Finding the Right Financing
Your Potential Return on Investment (ROI)
Finding an accurate property valuation ensures investors make profitable decisions. Whether you’re buying, selling, or renting out real estate, knowing the current value of a property is crucial in calculating your potential return on investment (ROI).
Purchase Price of the Property
An accurate valuation helps determine a fair purchase price of a property. Additionally, if you plan on selling your home, knowing how much it’s truly worth can help you set a fair market price without compromising your opportunity to maximize profits.
Finding the Right Financing
Lenders rely on property valuations to determine loan amounts. As such, they’ll likely require an appraisal of the property to find an accurate valuation before lending you money to buy it. After all, an accurate appraisal protects lenders by ensuring the loan amount isn’t larger than the property’s worth, decreasing the risk of default.
Manage Your Investment Properties With BMG
Knowing how to calculate property value is crucial for investors or anyone interested in buying real estate. Now that we’ve discussed a few different ways to determine a property’s worth, you can apply them to your next real estate purchase.
Need More Advice? contact us today!
If you’re a rental property investor wanting more time to expand your business, it may be time to hire a property management company. Finding a reliable and experienced company like Bay Property Management Group can help you save time on day-to-day tasks so you can focus on growing your rental property business. Contact BMG today to learn more about our services throughout Baltimore, Philadelphia, Northern Virginia, and Washington, DC.
