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How to Calculate Property Value Based on Rental Income

Sophia Merton
April 8, 2022

If you’re wondering how to calculate property value based on rental income, there’s a good chance you’re aware of skyrocketing rents across the country. According to a recent study of national rent growth, the median cost of a one-bedroom apartment in the US rose to a new all-time high in 2022.

While this is disturbing news for renters across the country, it’s also piqued the interest of many individuals who have played around with the idea of investing in rental property. With the added logic of investing in real estate existing as a traditional hedge against inflation and a potentially volatile stock market, it’s not an unreasonable time to consider whether or not you should start building your rental empire.

Choosing the right rental property is about more than getting a dirt-cheap deal or buying a duplex at random. It’s important to recognize that the property you select can determine whether buying investment property was the best or worst thing you’ve ever done for your financial wellbeing.

If you’re thinking about buying a rental property, you’ll want to understand how to calculate property value in order to assess whether a potential property is a good buy. Let’s look at how to do so using rental income as well as a handful of other approaches.

How to Calculate Property Value Based on Rental Income

If you have a list of properties you’re interested in, you’ll want to determine whether the rental income you can receive from the property is worth anywhere near the asking price. Let’s look at both the income approach and the GRM approach, both of which utilize how much rent you can collect to determine the value of a property.

The Income Approach

The income approach is a way to calculate property value based on the potential rental income in relation to the initial investment you would make. This is a commonly used approach in the world of commercial real estate.

In order to use this method, you need to determine the annual cap rate for a specific property. This is a percentage that represents the projected net operating income (NOI) divided by the property’s current value.

Let’s say you’re thinking about buying an office building that costs $200,000. You expect that your NOI will be $24,000, meaning this is how much money you will make from the property after you subtract the operating costs. To find the expected annual capitalization rate, you would calculate 24,000 / 200,000, leaving you with 0.12 or 12% as your cap rate.

This is a very simple calculation that investors can make to compare various properties.

If you want to determine how much you would be willing to pay for a property, you could determine a cap rate that you are comfortable with. Typically, a “good” cap rate is considered between 8% and 12%. In general, a higher cap rate indicates that an investment is riskier. That being said, there are obviously many different factors to consider when determining whether or not you want to invest in a rental property.

If you know that you want to find a property with a cap rate between 8% and 10%, for example, you can take the projected NOI and divide it by 0.08 and 0.10. This will give you a range of how much you would be willing to pay for the property based on your desired cap rate.

Gross Rent Multiplier

Rental property value based on GRM
The gross rent multiplier (GMR) approach is a quick and easy way to determine whether you should take a closer look at a property.

One way that you can calculate property value based on the amount of rental income you anticipate receiving is known as the gross rent multiplier (GRM) approach. This is a simple and fast way to analyze whether a specific property is worth taking a closer look at as an investment property.

When you use this method, you are considering whether the property is worth investing in before the cost of any other expenses, including insurance, taxes, and utilities. That means that, while it can be a useful tool in getting a rough sense of the property value, you will want to run further calculations before making an offer.

Through this method, you aren’t using net operating income as the cap rate like you are using the income approach. Instead, you are using gross rent to determine the approximate value.

The cap rate for the income approach is expressed in a percentage, while the cap rate for the gross rent multiplier is greater than one. You’ll want to compare the rental income and GRMs of comparable properties to get the best sense of whether a particular property is a good investment.

The GRM is the ratio of the market value of the property over the annual gross rental income. Since it is an easy and fast formula, it’s a great way to quickly determine whether you want to give a specific property a closer look.

In order to calculate the GRM, you will take the market value of a property and divide it by the annual amount of rent collected.

For example, let’s say you are looking at a property that has a market value of $250,000, and the gross rental income that can be collected each year amounts to $24,000.

In this situation, you would take $250,000 and divide it by $24,000, leaving you with a GRM of 11.11.

Let’s say that there’s another property you’re interested in that has a fair market value of $200,000. Each month, you can receive $1,500 in rent, giving you an annual gross rental income of $18,000. You can then take the $250,000 and divide it by $18,000 to find it’s GRM: 13.89.

If all other aspects of the properties are equal, this calculation indicates that the $250,000 property will allow you to pay off the property in a shorter amount of time. Depending on your investment goals, this could mean that it’s a better investment for you.

Again, though, it’s important to recognize that the GRM doesn’t incorporate any of the additional expenses that go hand in hand with investment property ownership. For this reason, you don’t want to use this approach as your only metric for determining the value of a rental property.

If you are trying to determine how much you might be willing to pay for a property, you can invert this formula.

For example, let’s say that you’re looking for a property with a GRM between 4 and 7 (this is generally considered the range that you want to shoot for, though a “good” GRM depends a lot on the type of rental market you’re looking to buy in.) If this is the case, you can take the gross annual rent and multiply it by 4 and 7 separately. This will leave you with a price range that fits what you’re looking for and allows you to calculate property value based on gross rental income.

What Are the Other Ways You Can Calculate Property Value?

Rental income isn’t the only way to determine the value of a property. Let’s check in with some of the other strategies you can use to calculate how much a rental is worth.

Sales Comparison

buildings to include in Sales Comparison approach
When you use the sales comparison approach (SCA), you're comparing a potential investment property to other similar properties to help determine its value.

When valuing residential real estate, the sales comparison approach (SCA) is one of the most common methods used. Real estate agents and appraisers regularly use this formula in order to determine the value of a property.

In this method, you are simply comparing comparable homes that have been rented or sold in the same area that you’re interested in investing in over a specific period of time. Investors commonly want to take a look at an SCA that spans a wider time frame to help them spot any emerging patterns or trends.

In order to assign a relative price value, features or attributes of properties are utilized. This might mean the number of bedrooms and bathrooms, pools, driveways, garages, fireplaces, decks, or anything else that might make a property noteworthy.

Through using this model, investors and real estate experts often use price per square foot in order to determine the valuation of a property. For example, if 1,500 square foot apartments are consistently renting for $1 a square foot, an investor can feel fairly confident that they can rent out their comparable 2000 square foot apartment for $2,000 a month.

The Cost Approach

This is a method of property valuation that uses how much it would cost to rebuild a structure if the property were demolished. The logic of this approach is that an investor doesn’t want to pay more for a structure than it would cost to build a similar structure.

When using this method, you need to consider the worth of the land itself as well as any depreciation that has occurred.

In order to use the cost approach, you can use comparable properties to help determine the cost of a similar plot of land. You can then take the square footage of the home and determine how much it would cost to rebuild it per square foot. On top of that, you will take the amount that the property has depreciated.

With this information, you can find the value of the property by taking the cost of rebuilding, subtracting the depreciation and adding the value of the land. This formula looks like this:

Cost of rebuilding - depreciation + value of the land = the value of the property.

Let’s say that there is a property you’re interested in and you’ve determined that the value of the land is $60,000, that it would cost $200,000 to replace the house, and that it has depreciated by 25%.

You would need to multiply 0.25 by the replacement cost, which would leave you with 50,000 as your depreciation figure.

In this instance, the formula would look like this:

200,000 - 50,000 + 60,000 = 210,000.

In this example, using the cost method, the value of the property is $210,000.

The Capital Asset Pricing Model

If you’re looking for a more comprehensive valuation tool, you can use the capital asset pricing model (CAPM). By incorporating the concepts of both risk and opportunity cost into the equation, you can get a more complete picture of the value of a property.

This approach utilizes the potential return on investment (ROI) you could receive through rental income and then compares it to other types of investments that require much lower risk. Examples of these types of investments include alternative real estate investing methods such as REITs or investing in United States Treasury bonds.

(Are you wondering how to calculate ROI on a rental property? Check out our article here.)

As a basic rule, it doesn’t make financial sense to invest in a rental property if you would receive a higher ROI through a lower-risk investment strategy. This is a useful method because it incorporates the reality that you are always taking on a certain level of risk when you invest in real estate.

For example, there are a lot of different factors that can influence your ROI when it comes to a rental property. The age of a property and its location can have a major impact on how much rental income you can receive. Different properties can also require quite a bit more maintenance than others, meaning that some properties might leave you with above average operating costs.

This formula looks quite a bit more intimidating than our other formulas:

​ERi​ = Rf​ + βi​ (ERm ​− Rf​)

In this formula:

ERi​=expected return of investment

Rf​=risk-free rate

βi​=beta of the investment

(ERm​−Rf​)=market risk premium​

This method is used to determine whether an investment is valued fairly using the principles of Modern Portfolio Theory. While there are some criticisms about this method, it can be another useful metric to add to your arsenal when determining whether a property is a good investment.

How Do You Determine How Much You Can Charge for Rent?

An essential piece of the puzzle when determining the value of a property based on rental income is accurately estimating how much rental income you can receive. While some properties might have a history of rental income that you can use as a part of your calculations, others might not. Let’s take a look at how to determine how much you can charge for rent.

Check Into Rent Control Laws

NYC skyline with rent control apartments
Some places, such as New York City, have rent control laws that you'll want to be familiar with before investing in rental property.

Rent control isn’t a factor in all states or cities, but you will want to know whether the area you’re interested in investing in has rental control laws. These are laws that are set at the local level, meaning that each city's average rent price will vary. Places that do have rent-controlled properties include:

  • New York
  • California
  • Washington, D.C.
  • New Jersey
  • Oregon
  • Maryland

If you are interested in investing in an area that has rent control, it’s a good idea to consult with an attorney about the restrictions and laws that would affect your potential property and how much you can charge for rent. Due to the pandemic, there are also moratoriums in place on rent increases in many jurisdictions.

Look at Comparable Rentals in Your Area

Once you have determined whether or not you need to be concerned with rent control laws or temporary moratoriums, it’s time to look at the rental value of other similar homes in the area.

Look for properties that have the same number of bedrooms and bathrooms as a baseline. The more similar your potential property is to other existing properties in terms of age, location, and additional features, the more confident you can feel when comparing rent prices.

How much you can charge for rent has to do with the property itself as well as the neighborhood it’s in. According to one survey, some popular characteristics include air conditioning, a low-crime area, and having a quick commute to work or school. For example, you might find that a rental property near a university can demand higher rent prices than a comparable property further away because of the demand for nearby housing.

Stay Aware of Changes in the Local Market

Rental rates can be fairly dynamic, meaning that it’s not really a “set it and forget it” type of situation. Local market conditions can change in a way that motivates you to raise or lower the rent.

Rental properties are considered a fairly long-term investment. After all, you aren’t going to go through all of the work to purchase a property just to turn around and sell it a few months or a year later. If you’re looking for a shorter-term investment style that involves real property, you might be more interested in house flipping.

Over the period of time that you own your rental, the neighborhood can change around it. Maybe new jobs have arrived in the area that increases rental demand and allows you to raise rental prices. On the other hand, maybe a major employer in the region leaves town. If this is the case, you might find that you have to lower your rates in order to combat the increased supply and reduced demand.

Consider Expenses Such as Maintenance, Repairs, and Utilities

Man performing lawn maintenance at a rental property
Before you make an offer, remember to factor in the costs of operating a rental property, such as maintenance, repairs, utilities, taxes, and insurance.

It’s important to be able to accurately gauge to the best of your abilities how much it will cost you to operate the property each year. If you estimate that your maintenance costs will be 1% of the property’s value, for example, you’ll want to make sure your budget leaves room for you to set aside this amount of money each year.

You can also take into account any property improvements you intend on making. Of course, you will have to factor in the cost of renovation. But depending on the ways in which you plan to improve the property, you can potentially charge higher rental rates than the property currently demands.

That being said, be careful not to invest too much in improvements in a market that won’t support the rent prices you are aiming to charge. If you totally gut and revamp an old row house in a run-down part of town with high crime, you might find that you struggle to find tenants that are willing to pay the rental rates you have in mind. If you believe you have your finger on the pulse of the market, though, you might find that the neighborhood improves over the course of the next several years or decades, leaving you with an impressive ROI due to buying in early.

On the flip side, though, if you invest in a less appealing part of town that doesn’t end up having property value increases as you expect, you could find that the property hasn’t been such a good deal after all.

When you’re picking the perfect property, it’s easy to get enticed by potentially high rent costs. However, it’s important that you take the costs of owning the property into account as well. You might find that a property that looks ideal from the outset will actually require expensive upkeep and repairs, while another property that didn’t look as great at face value will actually deliver a much more favorable ROI.

What Are Average Rental Rates in the U.S.?

How much you can charge for rent has to do with your location in the country, your specific area or neighborhood, the property itself, and more. This means that you aren’t doing yourself any favors to price your Omaha, Nebraska rental off of San Francisco rental prices. However, understanding the general range of rental rates in the U.S. can help you get a sense of the playing field when it comes to how much you can charge for rent.

According to an analysis done by in February 2022, the average rent for a one-bedroom in the U.S. is $1,684. For a two-bedroom, the average is $1997.

The range for rents in the U.S. is pretty huge when you start looking at specific cities. The average monthly cost of renting a one-bedroom apartment in Jersey City, NJ in February 2022 was a whopping $3,757, and a two-bedroom cost $5,003 a month.

On the other hand, a one-bedroom in Montgomery, Alabama during the same time cost an average of $676 a month.

Setting the right rental price has to do with finding the perfect balance. You want to price your rental so that it attracts high-quality tenants and is competitive with other options good tenants have. At the same time, you don’t want to leave money on the table.

Are You Looking for Tools to Help You Select the Right Rental Property?

As you can see, there are a number of different ways to calculate the value of a property. While these metrics shouldn’t be the only factor you use to select a rental, they can certainly give you a sense of whether or not a property’s listing price is in the right ballpark.

If you’ve been thinking about buying a rental property, you’ve likely come across the fact that there are a lot of different metrics you can use to identify how the sound of an investment each property is. It can feel pretty overwhelming to keep all of these different formulas straight, which is why we created Using our simple tool, you can get all of the most important numbers instantly presented to you in a way that can help you pick the absolute best property for your investment goals.

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Written By:
Sophia Merton
Sophia received her BA from Vassar College and is a real estate investor and researcher. With more than ten years of experience owning and managing investment properties, she has gained valuable insight into the pros and cons of operating rentals. Sophia is dedicated to helping others create wealth through real estate and aims to provide straightforward information about every aspect of rental property ownership.
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