Increasing Your Rental Property's Value
It's a common misconception among investors, especially new investors, that their property is worth some predetermined price per square foot. This is NOT necessarily the case. There are three basic approaches to appraisal, the first is market value, the second is the cost approach and the third is the income approach.
Market value is the most commonly used appraisal approach when dealing with personal residences. Your home will be worth more or less the same amount as similar homes in your neighborhood. Therefore the market dictates the value, and in most subdivisional situations, the value can be reduced to a number of dollars per square foot.
The cost approach is most frequently used in new construction, however it does have value in both residential and investment buys. The cost approach simply calculates the actual cost that it would take to rebuild an existing structure. In this market, you can easily buy a foreclosed property or a "short sale" for less than the cost to rebuild!
The income approach is the most valuable approach when analyzing an investment property! If your property is an investment property it is critical to at least annually revisit market rental values. Especially if you own a small multifamily complex like a duplex, triplex or fourplex, as your property's sales value will be most closely tied with the income that it produces.
Quite simply the value of your property is based on its income. The higher the income and lower the expenses, the higher the probable sales price. The savvy investor does not buy simply sticks and bricks, but more reasonably, he is buying an income stream. Therefore if you keep your rents low and you may have lower vacancies but you keep your value low. The secret is keeping your eye on the market and not being afraid of raising rents!