The best way to determine if a property is worth investing in would be through an appraisal. This process allows you as the buyer or seller of real estate assets to measure their value and make sure that your money won't go wasted by getting too excited about one piece before looking at others with less potential return-on-investment opportunities available from those properties which may have been overlooked the first time around.
How to Appraise Rentals?
The first step in the process of renting out a property is to determine its value and your ability to rent it. For rentals, there are two stages: the valuation of the property itself and the determination of rental value.
Appraising the Property
Property appraisals are an important part of today's real estate transactions. The first step in the appraisal process covers how to value your home, which is similar for all types of properties - setting their worth on par with others around them at that period. There will always be some specific guidelines guiding this portion depends upon what kind you have, but they vary slightly between structural styles so we'll highlight those key differences here too.
Deciding Rental Value
Once the baseline has been rated, the appraiser can turn their attention to what the fair monthly rent will be based on the market. Let’s see how that process works.
The first step is finding comparable properties in close proximity and calculating an adjusted rent rate based on their information - including details about any utilities or furniture included with each package deal.
Once the baseline is established, it is adjusted up or down to account for factors that make your property different, such as:
- Location / view considerations
- Property design and appeal
- Age and condition
- Room count and square footage
- Special features, like a basement
Filling out the Operating Income Statement
If you buy your investment property with Freddie Mack's regular mortgage, the appraiser will fill out an operating income statement with you. It discusses the rental income you earn each month and includes an estimate of your annual expenses for utilities and upkeep. Upkeep means the cost for repairs, replacing any appliances, etc.
Factoring in your Mortgage Payments:
When you buy an investment property, to qualify for a monthly mortgage you have to use rental income. If so, you should consider the appraised rental value of your appraiser.
No matter what rent you charge, You can still get insured by using 75% on all payments made towards that house with no vacancy factor calculated into them because we know how hard these things are sometimes.
How to Calculate ROI:
Now that we have looked at how mortgage companies estimate potential returns for valuation purposes, you may be wondering how quickly an investor can calculate the value of a potential real estate investment. This is where ROI comes in.
Adding your Investments Costs -
If you're not tracking your investing money, the purchase price will be a mystery. But don't worry - there are ways to figure it out. You can estimate what kind of mortgage or down payment would work best for you based on current interest rates and property values to get an idea before making any decisions.
Some of the other costs to consider are:
- Property taxes
- Closing costs
The Formula for ROI -
Once you got your inputs, calculate your ROI using this formula:
ROI = (Gain on Investment − Cost of Investment) / Cost of Investment
If you enter your value into the formula, you will get the result of your investment.