How much is your Howard County rental property really worth? Are you guessing? You’re either losing money or paying too much in the first place. Rental pricing, financing, and ultimately selling your investment all depend upon how accurate your assessment of value will be.
While many landlords choose a combination of shortcuts and gut feeling, this leaves you with lost profits and opportunities. Continue reading below as we take a closer look at why valuation is important to you and where most of you go wrong.
Why Accurate Property Valuation Matters for Landlords?
The impact of miscalculating the value of your property ripples throughout your overall investment plan. This is how an accurate assessment will positively affect each phase of your investment experience.
1. Setting the Right Purchase Price
Paying too much for a piece of property due to overestimating its worth creates problems at the very beginning of the process. Your profits will reduce, obtaining financing will become difficult, and you may spend years just trying to recoup your losses.
Valuing the property prior to making a purchase decision allows you to determine if the investment will make sense as soon as the money has been invested.
2. Pricing Rent Competitively
Rent is affected by value. When overvalued, your Howard County home remains empty with mounting monthly mortgage payments. While being undervalued, you leave tens of thousands of dollars uncollected each year. With an accurate appraisal, you can charge at a rate that the real estate market supports, not at a hopeful amount.
3. Qualifying for Refinancing
Appraisers are required for lenders to approve refinances. If your estimate doesn’t equate to the true value of your home, you won’t be able to refinance into a better interest rate or take advantage of the available cash-out option.
Having an accurate appraisal prior to refinancing allows you to take advantage of opportunities when they become available rather than missing them because of unrealistic expectations.
4. Maximizing Resale Proceeds
Knowing your property’s true value at all times can help you maximize the price you get for it in a sale. It also gives you the information you need to make smart decisions about timing the real estate market and deciding when to sell.
Common Mistakes Landlords Make When Estimating Property Value
Landlords, even seasoned ones, can fall into many common pitfalls when they estimate what their rental properties are worth. Here are some of the most common mistakes that you may want to consider as you try to avoid making these same errors.
1. Relying on Online Estimates
Zillow and other comparable websites provide convenient numbers; however, they are not appraisals. The algorithms that generate such numbers do not account for the many local factors that influence a property’s value, nor do they take into consideration the property’s condition or the changes in the Howard County Market since the last time that property was sold.
It is also dangerous to rely solely on such numbers when making purchasing decisions. They should be used as starting points to identify potential purchase price(s) rather than being considered as a final number.
Learning how to calculate property value can protect landlords from relying on inaccurate online estimates.
2. Ignoring Comparable Properties
Many owners only consider the amount that they paid for their property and/or what they would like to receive if/when they sell it, without considering what the same type of property sold for recently in the immediate area. This is referred to as “comparable sales” or “comps.”
Such data provides the most current and realistic information regarding the actual sale price of a comparable property rather than a guess of the future sale of his/her own property.
3. Confusing Market Value with Rental Value
The sale price of a property and the monthly rent it earns will have some correlation, but they are not equivalent. For example, a $400,000 home will not likely earn a $4,000 monthly rental income.
The rental value is dependent upon local demand, average rent per square footage, and how much actual renters pay. If you confuse these factors, you may be over- or under-pricing your properties, ultimately resulting in lost income.
4. Overlooking Property Condition
Identical homes located next to one another could vary in value by tens of thousands due to their condition alone. Buyers and appraisers view every aspect of a home, including updated kitchens, new roofs, and the impact of deferred maintenance.
Determining a property’s value while neglecting to assess its physical condition, will result in an inaccurate valuation. To be safe, most investors assess everything, from inspecting the property to reviewing the financial statement (if available), to making a final decision.
5. Using Outdated Market Data
Real estate sales in the last 6 months of similar homes will likely give an inaccurate picture of today’s Howard County real estate market. The interest rate environment, the number of available properties (inventory), and seasonal demand all affect a home’s value. Use the latest data and current real estate trends when estimating the value of your home.
6. Letting Emotions Influence Judgment
Since it is your property, it is natural that you would like to value your home based upon the memories you have made there, the sweat equity that you have put into the property, or what you believe it needs to be worth. However, the market is emotionless.
When you place an emotional attachment on your home and price it higher than it should be, you will end up with a longer vacancy and ultimately miss a great opportunity.
Conclusion
Misjudging the value of your Howard County home can cost you real money in the form of lost rental income, decreased equity, and investing in the wrong investment opportunities. Eliminate all guesswork when it comes to finding comparable homes using online estimates and mental math.
Use actual sales data for comparable homes, consider current market conditions, and remember that the sale price is different from the rental income for an investment property.
Consult with a local Howard County MD property management company to provide insights on how to properly evaluate recommendations and do the right rental market analysis for possible investments.