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The income and resulting cash flow (income less expenses) that a property can generate drive the amount a rental property is worth. Suppose that you can purchase a four-unit building in a rural area or you can buy a similar fourunit building in an upscale suburban community just a half-hour's commute from an economically robust city.
If each unit in the rural building rented for just $350 per month whereas those near the city rented for $1,000 per month, which building do you think would be worth more money? Or, looking at it another way, which building would you prefer to buy if both buildings were for sale for the same price? Higher rents translate into a much higher property sale price.
Suppose that property like yours typically sells for 10 times the property's gross annual income. For example, each unit rents for $1,000 per month × 4 units × 12 months = $48,000. And $48,000 × 10 (gross multiplier) = $480,000 market value.
Suppose that, through property improvements, you can increase the unit rents by 10 percent. Now the building is worth $1,100 per month × 4 units × 12 months = $52,800. And $52,800 × 10 = $528,000 market value. Thus, a mere $100 per month per unit increase results in a $48,000 increase in the building's value.
Plan for the sale of your rental property as far in advance as possible so your rental income is maximized. If any units are coming vacant, examine what upgrades can be done to boost the rent you can charge. Also consider what enhancements you can make to the building and survey the local rental marketplace to ensure that you're not underpricing units.
- Keep Copies of the Closing and Settlement Papers
- Keep Proof of Improvements and Prior Purchases
- Stash Your Cash in a Good Money Market Fund
- Double-check the Tax Rules for Excluding Tax on Profits
- Cast a Broad Net When You Consider Your Next Home
- Remember That Renting Can Be a Fine Strategy
- Reevaluate Your Personal Finances When Things Change
