Hiring Adelaide Property Valuers, licensed appraiser to provide you with the value of a property is a good and inexpensive way to get a second-opinion on the value you’ve come up with.
Professional appraisers use a mixture of science and art. Because they’re a disinterested third-party with no skin in the game, emotion is completely eliminated from how they value a property.
Appraisers draw on market-specific data such as recent sales comparables and property condition and amenities, then adjust the value of the subject property (the one you’re thinking about buying) up or down to make an apples-to-apples comparison.
For example, if the subject house has a newer roof it will be worth more than a comparable property with an old roof. If recent comparable houses sold have a swimming pool and yours doesn’t, your property valuation will be lower.
Key Financial Calculations to Determine Rental Property Value
While there are literally dozens of ways to determine the value of a rental property, most real estate investors use Adelaide Property Valuers key financial calculations to decide what a house is worth:
Cap Rate
The capitalization rate compares the annual net income of a rental property to the property value:
- Cap rate = NOI / Property value
$10,000 NOI / $125,000 property value = .08 or 8% cap rate
Remember that NOI doesn’t include a deduction for mortgage payments, only normal operating expenses. This makes it much easier to make an apples-to-apples comparison between properties.
Also, while the cap rate formula is a good tool to use to compare similar properties in the same real estate market, it shouldn’t be used to compare properties in different markets. That’s because market-specific factors like supply, demand, and market rents vary from place to place.
Return on Investment
Return on investment (ROI) measures the total return on a rental property:
- ROI = Annual return / Total investment
$4,000 annual return ($10,000 NOI – $6,000 mortgage payment) / $25,000 total investment = .16 or 16% ROI
Unlike the cap rate calculation, ROI considers the cost of financing a rental property. Because of this, the same property can have different ROIs depending on the down payment and other loan terms. Roofstock provides a great way to calculate financing using factors like down payment amount, credit score, and mortgage loan terms.
Using our above example, let’s look at how the ROI changes if an investor puts less money down and has a slightly lower annual return because of a higher mortgage payment:
$3,000 annual return ($10,000 NOI – $7,000 mortgage payment) / $12,500 total investment = .24 or 24%
Cash-on-Cash Return
Cash-on-cash return measures the amount of cash flow compared to the amount of cash invested. Unlike ROI, which can be used to measure return on investment over the entire time a property is held, cash-on-cash only measures the return for a current period:
- Cash-on-cash return = Annual cash flow / Total cash invested
Here’s an example of how to measure cash-on-cash return.
Let’s say an investor buys a house for $125,000 and puts 20% down. The investor has to spend $1,500 right after closing for needed Adelaide Property Valuers. The home is already Land Valuation Adelaide to a tenant, so there’s also an annual NOI of $10,000 and an annual cash flow of $4,000 after the annual mortgage expense of $6,000.
The investor’s cash-on-cash return for that year is:
$2,500 annual cash flow ($10,000 NOI – $6,000 mortgage expense – $1,500 upgrading) / $26,500 cash invested ($25,000 down payment + $1,500 upgrading costs) = .094 or 9.4%
Next year, assuming the investor has normal operating expenses and the same NOI, the cash-on-cash return would be:
$4,000 annual cash flow ($10,000 NOI – $6,000 mortgage expense) / $26,500 ($25,000 down payment + $1,500 upgrading costs) = .15 or 15%
Which Financial Calculation is The Best to Use?
The answer to this question depends on the investment strategy.
For example, cap rate is often used by buy-and-hold investors for property that is already generating income. Investors who want to maximize the power of leverage can boost their ROI by putting less money down or taking out a short-term, interest only loan.
Real estate investors buying rehab property where no current income is being generated may find that an annual cash-on-cash calculation is the best financial metric to use.
You can also use all three financial calculations when analyzing single-family rental property. Using multiple methods to determine the value of Land Valuation Adelaide property is a key to making the best possible investment decisions.
Doing a Property Valuation is The Key to Investing Success
Not all rental property is created equal. Successful real estate investors use every tool at their disposal to make the smartest investment decisions possible.
- Numbers to know when doing a property valuation include market value, mortgage payment, market rent, and cash flow.
- Factors that affect property value include improvements needed or already made by the property owner, property age, market conditions, and location.
- Adelaide Property Valuers to evaluate property value include determining fair market value and rent, replacement cost, and NOI.
- Three key financial metrics used to calculate property value are cap rate, ROI, and cash-on-cash return.
