Should I Price A Home On The Basis Of Its Rent?
Question: I want to invest in real estate. Is there a way to price homes based on rental values?
Answer: No doubt you can compute a return on investment given a purchase price and such factors as improvement costs, net income, the value of depreciation, savings through amortization, and appreciation (if any).
But then no one will care about such calculations if you can get the home for less in the open market.
If you’re trying to see the value of an investment in the future then some portion of your calculations must rely on factors which are both unknown and unknowable. No one can predict future rental rates or property values, so instead we “project” and “estimate” — cute expressions that mean we guess.
In practical terms, there’s a need to understand local values. What does it cost to acquire and fix up a property? What are reasonable rental rates? Is rental demand strong in your area — or are vacancies a problem? What is the importance of real estate tax benefits given your overall finances? If necessary, can you afford a monthly cashflow loss for several years? If yes, how much? Are local home values generally rising or falling?
Real estate investing is an art. The formula that makes sense for one investor may not make sense for another. For instance, the economics for Smith will differ from Jones if Jones does all his own repair work while Smith contracts out.
Lastly, there’s the matter of rent control rules in some 200 communities. Such rules sound like a good idea from a tenant’s perspective, but in fact they represent artificial marketplace restrictions that push up rental rates by limiting new construction. Investing in a community with rent controls will produce a different result when compared with an investment in a community with a free marketplace.
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Syndicated originally by Content That Works and posted with permission.
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