Equifax

Finance Blog

The Best Way To Value Investment Property

Written by Ilyce Glink on June 18, 2010 in Real Estate  |   No comments

 With property prices down, many armchair investors are thinking about getting up and making an offer. Whether you’re investing in residential real estate, a small strip shopping center, a commercial office building, a warehouse property, or raw land, the first thing you need to do…

Investment property value With property prices down, many armchair investors are thinking about getting up and making an offer.

Whether you’re investing in residential real estate, a small strip shopping center, a commercial office building, a warehouse property, or raw land, the first thing you need to do is figure out how to value the property. Only then can you make a savvy offer to purchase.

Whether you’re going to live in it or rent it out, when it comes to residential real estate, value is based on what everyone else has paid for similar properties in the neighborhood. To that you add or subtract based on the property’s condition, amenities, and specific location within the neighborhood.

But how do you value investment property? The primary way real estate investors value investment property is by looking at the annual net operating income generated by an investment property and then calculating the capitalization rate, or cap rate.

The formula for calculating the cap rate is as follows:

Annual Gross Rental Income – Annual Net Operating Expenses = Annual Net Operating Income
Cap Rate = (Annual Net Operating Income/Purchase Price) x 100

As I discuss in my book Buy, Close, Move In!, if your broker tells you a property has a cap rate of 10, it means that the property is priced at ten times the net operating income. Here’s an example from the book: Let’s say you purchase a property for $1 million that generates $150,000 in revenue per year. If the property’s expenses are $50,000, your net operating income is $100,000. Divide $100,000 by $1 million, and you have 0.10. Multiply by 100, and you have a cap rate of 10.

Ideally, you’ll have the highest possible cap rate on a property, because the higher the cap rate, the more profitable the property.

The challenge for many first-time real estate investors is they don’t know how to verify the income generated by the property or the expenses the owner incurs to keep the property maintained and upgraded.

One way to do this is to request a copy of all the leases for the property as well as a building budget. Typically, this step comes after you’ve made an offer, but not always.

When you look at the leases, you’ll want to verify the rent the tenant pays each month, what expenses the tenant pays, and how much time is left on the lease. You don’t want to find out at closing that the tenant’s lease expires in a month.

Once you find out how much the tenant is paying, you can start shopping around the lease to determine if you can raise the rent, and by how much. While the tenant’s current rent might be enough to pay the current owner’s mortgage, it may not be enough to support yours or meet your revenue requirements.

While you can peruse the building documents on your own, I suggest you put together a team of experts who can assist you along the way. This real estate investment team should include a top real estate agent[IG2], a professional property inspector (who specializes in the type of investment property you’re purchasing), a real estate attorney, a mortgage lender, and a tax preparer.

Your experts will help you not only read between the lines but also make sure that the value you ascribe to a particular investment property is really there.

Ilyce R. Glink is the author of several books, including 100 Questions Every First-Time Home Buyer Should Ask and Buy, Close, Move In!. She blogs about money and real estate at ThinkGlink.com and at the Home Equity blog for CBS MoneyWatch.


Read More.

No comments yet


Leave a Comment


Name :


Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.


Real Estate Archive

Stay Informed Sign up for our FREE Equifax email Newsletter