Car Rental Valuation
Valuation multiples typically used to value car rental companies include price-to-earnings ratio and enterprise value to EBITDA. To value XYZ Rentals using the market approach method, we would identify similar companies in the market, compare their financial statements, key ratios, customer base, and growth patterns. This allows us to estimate the value of XYZ Rentals based on performance and market position of comparable businesses.
Factors Affecting Rental Business Profitability
Most rental companies feel comfortable with after tax profits of over 5% of sales. However, factors like depreciation policies, fleet age, and maintenance expenses affect this. Unlike an airline, nearly anyone can open a small rental franchise and compete in one location against a large company.
Rental Property Valuation Formulas
Formula for Rental Valuation
The formula for calculating the rental value is: Rental Value = Monthly Rent × (1 − Vacancy Rate/100) − Operating Expenses. The vacancy rate represents the percentage of unoccupied rental units in a property. The formula takes into account the monthly rent, adjusts for the vacancy rate, and subtracts operating expenses.
Gross Rent Multiplier Calculation
To calculate GRM, simply divide the current property market value or purchase price by the gross annual rental income: Gross Rent Multiplier = Property Price or Value / Gross Rental Income. The formula for real estate is Capitalization Rate. You can find it by dividing net operating income by total property price.
Real Estate Investment Rule
The 2 percent rule states that you should aim to buy a rental property at a price where its rent is 2 percent of the total cost. For example, if the all-in price of the property is $50,000 and it rents for $1000/month, the rent is 2 percent of the cost ($1000 / $50,000 = .02 or 2 percent).
Common Methods for Rental Property Valuation
Methods for Valuing Rental Property
To value rental property businesses, the Comparative Market Analysis (CMA) method is commonly used, while the Income Capitalization Approach and the Sales Comparison Approach are relevant valuation methods for specific locations. It is crucial for investors and industry professionals to consider these factors and valuation methods when determining the value of a rental property business.
Comparison of Valuation Methods
Real estate investors often value a rental property using several different approaches, then compare the results. Here are 4 of the most common valuation methods and tools used to value a rental property:
- Gross rent multiplier approach
- Simple GRM formula
- Multiple valuation methods can be utilized
- Importance of choosing the right valuation method
Income Approach for Property Valuation
Calculating property value using the income approach involves determining Net Operating Income (NOI) and applying the capitalization rate. The income approach is a widely accepted and objective method for appraising income properties or rental properties based on income potential.