Importance of an Appraisal Done Before Purchasing an Investment Property
Before investing in a rental property, it’s always a good idea to look at all the different components that may affect the marketability to make sure you are making a good decision. Once you’ve found a property that provides a favorable return, it’s wise to get a second opinion from a local real estate appraiser.
But how do you determine if the income property is a good investment? What is Market rent in the Area? And, how do you decide how much to charge your tenant(s)?
When you’re considering purchasing an income property or other real estate investment, it’s important to contact a local appraiser. The appraiser’s opinion of value may support your findings, or may put you in a better position when negotiating with the seller. The appraisal report can provide backup and support when writing an offer to purchase or when presenting a counteroffer.
Why Appraise your Rental Property?
If you are looking to invest in an income unit(s), it’s important to examine the income and expense details along with the demand in rental market in the area. This must be taken in consideration to be certain the investment is protected.
Also, you should be clear on how much you should charge for rent. Chicago Appraisals can give you an accurate assessment of the history of market rent in the surrounding area. Along with the current inventory (supply) and marketing times (demand) for rental units in the market area. This data will allow you to identify trends and will provide better insight when setting the rental price and terms accordingly.
Many investors order an appraisal for their rental properties every few years to remain updated on the rental market. Not keeping up with the ever-changing rental market can prove to be a costly mistake.
How Much Should You Pay for an Income Property?
If you are looking to invest in an income property, there are different ways to figure out the value of the building based on the rent it takes in.
One useful calculation is the capitalization, or “cap rate.” The cap rate is the ratio of net operating income to thecurrent market value.
To find your cap rate:
- Start with the gross rental income. Then:
- Subtract 3-5% to account for occasional vacancies throughout the year.
- Next, add up the yearly operating expenses. (Including property taxes, insurance, utilities, and at least 5% of gross income for maintenance.)
- Subtract this from the annual income.
- Finally, to get the cap rate, divide your net operating income by the purchase rate.
Depending on the building and the location, it might get a 4% to 10% return. For a property that requires much more upkeep and attention, you may want to consider a higher cap rate.
Furthermore, the cap rate assumes that the property was purchased in cash. If you are taking on a mortgage, you’ll want to factor in your debt costs.
Contact Chicago Appraisals for your Income Property
When looking for an appraiser for your investment property, it is important to choose an experienced professional.
Chicago Appraisals has been trusted by real estate investors for many years. We have several past clients that order an appraisal from us before investing in any type of property.
Before ordering please be aware that a certified appraiser can appraise income property up to four units. Anything over four units would require the assistance of a commercial or general licensed appraiser.
Whether you are looking for an appraisal for an attached condo, detached home, or 2 to 4 family units, contact Chicago Appraisals to learn more about our income property appraisal services.
The law surrounding investment property is complicated and the facts of each case are unique. This article provides a brief, general introduction to the topic. This is not legal advice. Please contact an attorney to provide legal advice. As with any legal matter, we highly recommend consulting with an attorney.