Does rental income potential affect property value?

Question

I’m a newish investor looking to purchase my first vacation rental.  I currently own 1 SFR and Airbnb my primary residence.  How is potential rental income accounted for, if at all, in the purchase price of a property?

I’m looking at a property listed at $275,000 with a 5-year rental history of $30,000 - $35,000 per year.  Problem is the seller just bought the property 2 years ago for $200,000 and has done no major improvements.  The only thing they have done is purchase all new furniture (property being sold furnished - it’s high quality furniture).

They think the rental history makes the property worth more.  Does it?  Or should the purchase price be based entirely on comparable properties, regardless of whether they are rentals?

Thanks!

Ryan Deasy · Answer

@Amy Canfield residential is based on comps. commercial is based on income.

Amy Canfield · Answer

Thanks everyone.  I'll take my eye off this "shiny object" and concentrate on better opportunities.  I appreciate your responses!

John Underwood · Answer

Rental potential has nothing to do with an appraised value of a residential property.

Ken Latchers · Answer

First of all, you should be using reasonably sophisticated ways at purchasing a property at the best price possible. Auctions, prices under market, etcetera. Why any interest in a house that you think is greatly over value? If they're getting that rent that means you can probably get that for any house in the area.

second, vacation rental income is significantly less valuable than long term rental income. You were paying credit card fees, towels and coffee and other supplies, higher insurance rates, self-employment tax, furnishing, high maintenance, decreasing Market saturation, booking site commissions, a lot of other stuff.

third, 30 to 35 thousand on a $275,000 house is peanuts 'str wise. Im getting up to 15% long term rental on an older home. Without all the Airbnb headaches.

Avery Carl · Answer

To echo the others, while the rental income might make buyers more interested in property, it’s still a residential property and neither the rental income nor the furniture have any bearing on the appraised value of the property.

Jeffery Wilen · Answer

Unless it’s a multi family property with 5 or more units, the valuation of the property is entirely based upon comparable properties not on income. 5+ units is a commercial property and the value is then based on net income and the market cap rate for comparable properties in the area.

Theresa Harris · Answer

It is possible the house went up in price due to the market.  See what other homes in the area sold for 2 years ago vs today.  Talk to your realtor and get them to run the comps based on the home, not the business that is in it.

Jonathan W. · Answer

@Amy Canfield

Firstly, the land or area went up in value. If anything a homes physical being depreciates just like a car but the immobility of the land and house making it unique and special are what bring the value. The area obviously got better.

Think about it, some people sell their homes so someone can come in and destroy it and build a new one. It doesn’t matter what the buyer wants to do with the house, the value comes from the area and the economics behind that.

Rental rates can affect what happens but it generally doesn’t lower or higher value.

Think of it this way, you want to invest in an area but the gap rate is terrible. So to make a profit you could only offer a certain amount and no more. Well if the numbers don’t work you won’t buy, but it won’t matter because that means there are other buyers because the seller is sill getting it sold. Now if things or prices are going south but rental rates goes up, stay steady or decline by very little, then the investors numbers and price offer could become the new market value because they would be the top dogs who are willing to pay. Then they’d make a profit.

Value, purchasing power, rental rates, land, appraisals, CMA’s ,

Rental rates are definitely lower, on the list of what affects property value

Brent Paul · Answer

Sounds like the seller is trying to fluff up the price on this one.  I would pass.  More than likely they will end up lowering their price.  Some can be real stubborn.  If comps don't support their price than it's not worth it.

Does rental income potential affect property value?

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