Valuing Your Rental Opportunities
How the Industry is Shifting to Help Investors Reduce Their Risk
by Frank Guarnera
After what has been a unique year to say the least, the future is looking like it may be ripe with opportunity and risk. Which is why it is so important to understand your assets now more than ever.
As we may have some volatility or changes over the next year, it will be important to understand long term investment potentials. Anticipating this, the valuation industry has continued to evolve to provide solutions that can deliver valuable intel to help investors make more informed decisions. By integrating local rental data into traditional valuation products, it helps paint a clearer picture of whether an asset may be better suited as a short-term or long-term investment, or one to avoid altogether. Understanding the intrinsic value of a property is the cornerstone of the decision-making process along with knowing your Net Operating Income and Capitalization Rate. Several different products are available in the industry to provide important data in addition to the typical FNMA 1004+1007.
The Desktop Appraisal
Desktop appraisals, sometimes referred to as hybrid appraisals have been available to home equity lenders, servicers, and loss mitigation for several years. These products are fast becoming the preferred valuation tool with private lenders for fix and flip, long term lending and single-family rentals. While the products have a lower price point and faster turn times, the reliability and quality are on par with traditional appraisal products. Many of these desktop appraisals are USPAP (Uniform Standards of Professional Appraisal Practice) compliant and the data contained in them is much more user friendly than the traditional GSE format. The desktop appraisal bifurcates the appraisal process by leveraging a third-party data collector and the expertise of the local appraiser creating significant efficiency resulting in quicker turn times and lower appraisal cost without sacrificing quality. Valuable insight is also gained when these products provide additional forecasting data that considers both historical data trends and economic factors. This allows you to get a general idea of the expected appreciation/depreciation in an area. Combining all this data in an easy-to-read format helps investors make better informed decisions on these types of long-term decisions. Knowing the market value of the asset will help direct your investment strategy. Is this an asset I should sell now, rent for a period, and then sell, or keep as a rental property indefinitely? A desktop/hybrid appraisal can help answer those questions for less money and time than a traditional appraisal without compromising the quality.
The Broker Price Opinion
A Broker Price Opinion with a rental addendum has also shown to be a reliable source of information. In many situations, they are used as a low cost and fast resource to secure an inspection, property data, and rental information for the area. Leveraging the expertise of a local real estate agent, these are a valuable resource for anyone looking to secure more relevant data and get feedback from an agent in the area. By also receiving a BPO, you are gaining insight about the asset itself. With the rental addendum, you can pull in intel to perform a market-extraction which can help inform a reasonable capitalization rate for the area and your property.
AVMs for Rental Market Trends
Rental AVM’s have also continued to improve and can provide good insight of rental market trends. A robust dataset that can provide both historical and current rental trends can help establish what would be a credible rent price for an asset which will in turn, when combined with a property valuation, can help shine light on how good the investment may be based on the equity in the property and the future potential of the area. These will typically require you to do much of the deep diving but to the savvier investor, these tools have shown to be valuable.
When it comes to identifying potential rental rates, there can be many challenges as the rental market is less liquid and transparent than the traditional real estate market. Rental data continues to become more reliable, but validation remains an important component of rental valuations. Getting a clear picture of what is occurring in the local market is a powerful indicator of what local market renters are interested in, willing to pay, and how long they stay. Further investigating vacancy rates and other value influencing features is paramount in reducing risk for long term investment strategies. Focus on what is going on in the local area regarding city migration and real estate development, inventory, economic conditions, and overall rates of appreciation. Do not let a lack of data be the reason you miss out on a great property or choose a strategy that does not yield the best return.
Valuations continue to be an essential component with investment properties and there are a host of products to get you the information you need to make the best decision.
