It is common for investors to own multiple pieces of real estate, one of which could serve as a primary residence, while the others are used to generate rental income and profits through price appreciation.
Revenue properties have a variety of uses. The more common uses include multi family residential, retail, office, industrial, hotels and motels. The size of a portfolio can vary from the grass roots investor with a second home or duplex to pension funds, or real estate trusts, which may have investment properties in the hundreds.
Market Value is the relationship between the amount of revenue that the property can potentially produce and the return anticipated in the marketplace. A property appraisal will determine the value of the real estate based on the rental income and expenses attributable to the property. Revenue property can be rented either with or without a lease and on a short or long term basis. A Lease is a legal document that defines the rules that the landlord (owner) and tenant shall abide by. The lease will define the rules and parameters that tie the landlord and the tenant together through the property. The lease can be on a net rent basis, where the tenant is responsible for all occupancy costs such as property taxes, utilities and insurance; or on a gross rent basis, where the landlord collects the rent and pays the occupancy costs. The parameters defined in the lease translate into market value of the real estate.
The relationship between income and market information reveals the estimate of market value of the revenue property. Professional Property Appraisers have the experience and credentials to perform such exercises for their clients. Market information is drawn upon to support the opinions of the Property Appraiser. The professional Real Estate Appraiser can prepare an appraisal to determine the value of the property based on the lease, and whether the property is leased at, above, or under market rental value. This ensures that the property is evaluated under current market conditions.
Other factors influencing the value of revenue properties include:
- Vacancy history of the property
- Condition of the property at the time of valuation
- Any capital improvements that have been performed in the previous time frame, usually 3-5 years
- Capital projects that are planned for the property suggest areas of the property that need immediate repair, or retrofit
- Changes and trends in the neighbourhood where the property is located
- Changes in the financial markets reflected in Mortgage Rates
These factors influence the lease rate and anticipated return on the individual property. This influence will be reflected in the final value estimate and actual sale price of a given property in the marketplace.