As a landlord, you’ll want to keep in touch with the real estate market on an ongoing basis to know your home’s value.
If your strategy is to sell when the market is up, it’s smart to keep tabs on home value so you can see when the time is right. You’ll also want to keep up with trends and expectations so that you don’t sell too soon. No one can predict a peak with absolute certainty, but there are signs to look for that give you a good idea.
If you’re not planning to sell and are using the property for cash flow, it’s important to understand the home’s value to ensure your investment remains a good one. Know what comparable homes are worth, and find out or keep a history of the upgrades/repairs/maintenance so you can keep your property in top shape.
How to find your home’s value
The best way to determine your property’s value is to look at what comparable homes have sold for in your area recently. Do this about once a month so you can track the direction of housing prices.
Be sure to factor in basics such as neighborhood, school district, and square footage when looking at comparable homes. Add in significant amenities, such as hardwood floors, washers and dryers, and solar panels (if you have them). Neighborhood amenities, such as closeness to public transportation or good parks, should also be part of the calculation.
You can use many online sites, such as Realtor.com and Redfin, for data. You can also search local real estate agent sites. Act as if you were looking for a property, and gather information.
How to determine the value of cash flow
To determine the value of cash flow, work out the capitalization rate, or the cap rate. It’s a simple figure: the ratio of net rental income to the property’s purchase price.
- Total your gross rental income for the year. Start by setting the right rent price. It’s a good rule of thumb to take 5 percent off this to allow for a reasonable vacancy rate.
- Then, calculate your property’s annual operating expenses. Include insurance, utilities, and property taxes, along with 5 percent of gross income for a maintenance and repair fund.
- Once you have the annual operating expenses, divide it by the purchase rate.
Here’s an example. Your property cost $500,000. Your gross yearly income from rentals is $50,000. If the yearly operating expenses are $15,000, you’d have $35,000 in net operating income. Divide net operating income by property cost, and your cap rate would be 7 percent. If you want to raise it, you’d have to increase the rent or decrease your operating expenses.
How to increase your home’s value
Whether you plan to sell when the market climbs or are looking to achieve robust cash flow, the result of your calculations might indicate you need to increase your home’s value. Fortunately, there are many ways to do this.
Here are some ways that can hike the purchase price or rents going forward, particularly if comparable homes and rental properties have these types of upgrades.
1. Upgrade the kitchen
People love to see gleaming, modern kitchens. If your property has Formica or butcher block countertops, for example, renters will probably perceive the kitchen as dated even if the material itself is in OK shape. Granite and quartz countertops both look contemporary. They are also durable and both generally cost in the neighborhood of $2,000-$5,000.
Chrome fixtures can develop pits and disfiguring marks. They are also common and do not distinguish the kitchen. You can add pewter or nickel fixtures that make the kitchen look customized and high-end for as little as $50 or $100, depending on what you pick.
Other improvements to consider include the following:
- Refacing cabinets: Kitchen cabinets could cost in the neighborhood of $3,000, depending on what you do.
- Updating the backsplash: A new backsplash could run you $10 a square foot.
- Replacing old appliances: Major appliances typically cost $500 to $900 a piece.
- Improving the lighting. Recessed lighting is around $20 to $60 per light, and pendant lighting varies depending on what you choose.
Cost for a complete kitchen remodel: $20,830 (national average)
2. Remodel the bathroom
If the kitchen is the most important room to keep updated, bathrooms are a close second. If the countertops are really low with sinks shaped like a seashell, you may want to upgrade. You can put in new cabinets and countertops for about $1,500. The more elaborate you get, the more it’ll cost you.
A new toilet might be necessary. Plan to spend around $200 for that. Consider a shower upgrade, too. Depending on what you get, you could spend as little as $450. But keep in mind, some shower upgrades can cost up to $10,000.
Cost for a complete bathroom remodel: $9,627 (national average)
3. Install wood floors
Wood floors are extremely popular with homebuyers and renters. If you have carpet, upgrading to wood floors, at least in your living room and kitchen areas, can make your properties more desirable. Plus, wood floors are easier to clean and repair.
If you’re looking for something that’s more affordable, consider laminate flooring. Not only is it easy to clean and scratch resistant (hello, pet-friendly units!), but it also costs less.
4. Increase the storage area
More storage is a mantra for many renters and homebuyers. Invest in closet organizer systems that maximize the utility of the space you have. Add creative coat hooks and storage areas to entryways. Add shelving in rooms currently without storage. Pull-out systems can be a creative solution.
If you own a home or luxury unit, you may want to consider remodeling the bedroom to have a walk-in closet, which can have huge appeal. However, for most properties, a reach-in closet will work just fine.
Cost: $1,500 (walk-in closet)
Whether you’re looking to sell your property when prices rise or want to maximize your rental cash flow, it’s imperative to keep on top of your home’s value. Get comparable prices, and figure out your cap rate. If you need to hike your home’s value, use one of the upgrade strategies here.