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How to calculate the value of residential property on rental basis

When looking at a residential property to invest in, the real value lies in the amount of income you can bring in on a rental basis. To calculate the value of residential property on a rental basis, you need to calculate the gross rent multiplier. The GRM is the estimated amount of income you can make renting out the property. The only things you need to obtain this number are the sales price and the monthly potential rent income.

Obtain the sales price. Finding this number is as simple as looking at an ad for a property or calling an estate agent. For this example, you will look at a house listed at £162,500.

Compare the property with comparable properties available for rent. Make sure that you are looking at similar style of house, amenities and comparable locations. Find at least three values and average them out. For example, you have rents for similar locations of £1,300, £1,625 and £1,560 per month. Adding them up and then dividing by three, you will end up with £1,495 average.

Divide the sales price by the estimated gross monthly rent. This will give you the GRM. So, £162,500 divided by £1,495 equals 109 after rounding up.

Multiply the GRM by the estimated gross monthly rent. This will give you the value of your property on a rental basis. Continuing with the previous example, if you multiply £1,495 by 109 you get a value of £162,955. In this case, the value is actually more than the list price, making the home a good investment. If, by following steps 1 to 3, the value is significantly below the purchase price, you will want to look elsewhere.

About the Author

Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.

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