How Do I Calculate Property Value on Rents?

When it comes time to appraise the value of your rental property, you might be surprised to learn that the methodology for accomplishing this is somewhat different than you would typically rely on for a personal residence. After all, a rental property's value is affected significantly by its ability to generate ongoing revenue as opposed to strictly what it could fetch during a sale. With that in mind, property appraisers who specialize in real estate for rental purposes can choose to either focus on the value of the physical real estate (i.e., cost per square foot) or address the potential income generating capability of the building itself. Both methods may lead to similar or divergent appraisal values.

Calculate Cost Per Square Foot

One of the most common methods of property appraisal is the price per square foot method. Using this technique, an appraiser would research nearby properties of similar size and compare their selling prices to their geographical footprint to derive an average price per square foot of real estate. With this calculation, an appraiser could then assign a value to the rental property solely based on its size. While this number may not reflect its potential income generation capability per se, it remains a widely recognized method for assigning a value to a rental unit.

Understand the Gross Rent Multiplier

The gross rent multiplier, also known as the gross income multiplier, is a powerful tool for analyzing the value of a property relative to the amount of rental income it can generate. This tool can be used in two unique ways. One possible method of applying this method is to divide the annual rent made by a property into the total of its property value. For example, if a rental house in San Francisco is worth $5 million and rents for $120,000 a year, its gross rent multiplier would be 41.7. Inversely, if an appraiser was able to obtain the gross rent multiplier for a particular property or neighborhood and the current rent for the unit in question, they would then be able to calculate the total property value of the property using this information.

Determine Capitalization Rates

Determining a capitalization rate for a property provides an even more nuanced approach to appraisal. This figure represents the net operating income of a property divided by its sale price. Net operating income is derived by calculating the sum of a property's yearly rental income and subtracting all related operating expenses. Once this calculation is complete, the net operating income is divided by the price of the property in order to determine a decimal-formatted representation of the capitalization rate. You can multiply this number by 100 to obtain a percentage-formatted representation of the capitalization rate. As can be seen with this unique formula, it is possible to obtain a variety of critical information related to the appraisal of a property using a few relatively straightforward mathematical calculations.

Things Needed

  • Calculator


  • If you are using the formula to determine the value of a property you are considering purchasing, compare the estimated market value to the current list price to determine whether the property is priced correctly.


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