Investment in rental properties could be a wise financial decision if the investor performs the necessary homework in order to determine its actual worth. The actual worth of an investment property does not only depend on its market value, but also on the hidden expenses and the free cash flow generated through the same. However, before making an investment decision, one should calculate whether the rental property is well-priced. This article will discuss some of the basic formulas that can be used for determining the actual market price of a potential rental property.
According to James Kobzeff, a software developer for real estate investing, three areas needed to be considered when deciding on a real estate investment. These are, ‘the local supply and demand trends for rental properties, the local market classification as buyer’s or seller’s market, and the current trends and suggestions for the future.’
In knowing these areas, Kobzeff suggest discussing the same with a real estate professional or else to take some time out and do it on one’s own. Following is a brief description as to how an investor should recognize whether the rental property price is excessive or reasonable.
Supply and demand calculation
By evaluating the supply and demand, it will be possible for an investor to arrive at a conclusion regarding the potential of a rental property. The method of calculating the supply and demand is by calculating the number of rental properties currently on sale and divide the number by average number of sales per month. This will present to the investor the number of months of rental property inventory currently on the market.
The spread calculation
This calculation will yield in a percentage after subtracting the sale price of a property from the listed price and dividing the same by the original asking price. The spread calculation will give an idea to the investor regarding the sales trend in the market and the price at which one should make an offer.
The time of the market calculation
According to Kobzeff, the idle time between the date of announcing the sale of an investment property and the actual date on which the property becomes sold can indicate to the potential investor the average number of days a property should sit on the market.
At the same time, one aspect that most investors might not realize is that, debts such as mortgage payments may not be included in the operational expenses depicted in the financials of a potential real estate property. Thus, careful analysis of the provided financials is necessary before making any commitment towards a real estate purchase.
Although it is necessary for potential investors to do their own homework with regard to rental properties, one should also take steps to gain the insights of a real estate analyst in relation to substantially large investments. The reason being that, certain properties require complex analysis than what was described above.