Want to know how to value your Kansas City rental property? Great. Let’s walk through a few things here. The first thing you have to determine is the income. What is the real, current rental value of that particular piece of investment property. Doesn’t matter if it’s a single family home, duplex or 87 unit apartment building. It should have a going rate that you can know it will be rented at 95% of the time. Take the monthly rent (income) and multiply that by twelve.
Now, how about expenses? Some will be known. Some will have to be guesstimated. But figure your expenses. You know, things like insurance, vacancy, maintenance and new carpeting every 5 years. Don’t forget roofs and furnaces or property management or evictions. Stuff happens even when you are a real estate investor. Or especially if you are a real estate investor.
Subtract the expenses from your income and ta da! You now have a Net Operating Income. Everything else we do in the future here is worked off your NOI. Divide your NOI by your purchase price and you have the famous Cap Rate. Now, keep in my mind, Cap Rate is not the be all end all in valuing your investment but it is a great start. It’s also a good way to price a rental home because it doesn’t worry about what the cost of money will do to your returns. As a seller, that’s a buyer’s problem. Not yours. Well, at least it used to be.
There is still work to be done. You now need to find out where else you could have invested that hard earned cash to see if those returns would have been better off here or there. Within any given area or neighborhood a pattern of returns will begin to surface. To be sure, most real estate investors and real estate agents have no idea how to do this or they just don’t do it. So through trial and error they will generally come back to any given market.
Price a duplex for sale too high and it will sit and sit until the price is reduced to the point where a savvy investor will lay down some cash. Price a single family home too high and the same thing will happen…except that maybe a Joe or Mary will come by and pay a little too much for the place because it’s the perfect place to start a family.
Another way to value the place is to figure out what the Cash Flow Before Taxes is (NOI – Annual Debt Service) and then divide that by the cash invested. This throws off the other famous indicator called Cash on Cash. Again, a rule or more-rather a threshold, will begin to show itself in any given area of what an acceptable, going Cash on Cash rate is.
And of course, there is more and that is even more detailed. But I won’t go there here. I do go there with my clients. 🙂