4 Ways to Analyze Income-Producing Property Value Quickly

Published: 15th December 2008
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This article discloses four methods real estate investors and analysts typically use to analyze income property value quickly, i.e., without a serious real estate analysis.

By themselves, these methods don't reveal whether the property is a profitable and sound investment opportunity. Moreover, as stand-alone measurements, you shouldn't rely on them to make your real estate investment decision.

Nor are they a magic bullet. Not unlike other methods associated with real estate investment, real estate investing requires a sound analysis of a wide-range of factors such as local market conditions, condition of the building, and everything in between. In other words, successful real estate investment requires far more due diligence then these methods suggest.

Still, they do provide a good rule of thumb to help you compare a property's performance to other income properties recently sold or currently for sale. So you can roughly determine whether the asking price on one income property is inline with other income property with minimal effort.

Just bear in mind that the results are just a small part of a sound real estate analysis. All four computations must be examined as a whole and against a myriad of other factors. At best, each of these evaluation measures should be considered only as a first-glance analysis of the real estate.

Okay let's look, starting with the methods you would use to measure property price then the property's financial performance.

1. Price per Unit - This is a good first rule of thumb measurement of price because it's informative yet easy to compute. You merely divide the price for the rental property by its number of units. For example, a 10-unit apartment building that sold for $800,000 sold for $80,000 per unit. The result says little about the condition or configuration of the units and therefore requires a deeper real estate analysis, but it does provide you with a vague idea about what rental property prices are in the area.

2. Price per Square Foot - This also provides an easy computation for a measurement of price. Just divide the property's price by the square footage of its improvements (which typically can be gotten from the local tax assessor). For example, an income property with a 10,000 square foot building that sold for $800,000 sold for $80.00 per square foot. As before, you need to know more so you can correctly compare it to other properties, but it's a decent quick look.

3. Gross Rent Multiplier - This is a good initial measurement of the property's financial performance because you can compute it in your head. Just divide the property's price by its gross scheduled income. A property that sold for $800,000 with a gross scheduled income of $96,000, for instance, sold at a 8.33 gross rent multiplier. To have credibility, however, you need to know the property's correct gross scheduled income, which might mean a telephone call to the previous or current listing agent. As a buyer, the lower the gross rent multiplier the better.

4. Cap Rate - This is a better financial measurement than gross rent multiplier (and far more popular) because cap rate accounts for the property's operating expenses. The downside is that cap rate relies on net operating income; thus requiring you to obtain income and operating expense data to compute the net operating income, which then is divided by the property's sale price to arrive at its cap rate. A property that sold for $800,000 and had a net operating income of $54,376, for example, has a cap rate of 6.8%. If you find it difficult to obtain data on sold properties, and therefore are unable to arrive at an average cap rate in your local market, consider asking the tax assessor, an appraiser, or qualified real estate agent what it is. As a buyer, the higher the cap rate is the better.

As stated, these four methods can effortlessly be computed in your head, or at the most, with a pad and pencil. Just be sure to use verifiable data. And remember, this is so you can do a quick real estate analysis. You might consider using quality real estate investment software for a complete real estate analysis.

Here's to your real estate investing success.

James Kobzeff is the developer of ProAPOD - superior real estate investment evaluation software solutions since 2000. Create a real estate analysis on any rental property in minutes! Preview at => www.proapod.com

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