Investment property values are set differently from home values. This is especially true for multiple-unit buildings such as duplexes and apartments. Investment property values are determined by the dollar value of rents earned or, putting it another way, are based on how well that property generates income. The method includes an adjustment for an assumed vacancy level, a contingency applied even when recent history shows that no vacancies have occurred.
Basing value on gross rental income (adjusted for the vacancy factor), is common practice for multiple-unit buildings, but not for single-family housing. Even if you invest in a single-family house and use it as a rental property, an appraiser is probably going to judge its value based on the same methods used for owner-occupied housing—using comparable values of houses in the same area or similar areas rather than calculating value based on the income you generate. This makes sense. A potential buyer will not necessarily use that house as a rental, whereas the buyer of an apartment building will definitely rent out the units. From the appraisers point of view, a single-family house has value as an owner-occupied property, regardless of how it is actually being used today.
The calculations are commonly used for setting value on income property. It is the gross rent multiplier (GRM), a factor developed by dividing sales price of
an investment property by monthly rents.
An appraiser is setting the value on a three unit investment property you want to sell. You earn $1500 per month in rent. Using three comparable properties that sold recently, the appraiser develops gross rent multipliers (GRMs) for each. The sales prices are divided by monthly rents to arrive at the GRMs.
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