Evaluate Rental Properties in Nigeria: 4 Amazing Tips to Set the Right Rent for Your Property
It is simpler to keep tabs on the performance of investments like stocks and bonds than to evaluate rental properties. It is because investors may check their brokerage accounts or financial news websites at any time to see how their holdings are doing. Unfortunately, investing in real estate involves a little more work because this asset class tends to be more private and doesn’t offer the same daily visibility into pricing and performance.
In light of this, evaluating rental properties’ Internal Rate of Return is one of the most widely used methods to determine their profitability (IRR).
IRR (Internal Rate of Return): What Does It Mean?
The Internal Rate of Return (IRR) is a measure that informs investors of the typical yearly return they have already earned or can anticipate from a real estate investment over time, represented as a percentage, according to Cadre Insights.
The Crowdstreet blog** describes the IRR as “the rate at which a real estate investment grows” in more straightforward terms (or, heaven forbid, shrinks). In this regard, it is a time-sensitive compound annual rate of return.
The idea of IRR is to integrate a profit and time metric into a single measurement;
- Profit: How much money an investment makes compared to the amount you invested.
- Time value of money: It is a bit more complicated but merely explains how inflation impacts the value of money over time. In other words, a Naira today is worth more than a Naira in five years. For instance, N100 now might only be worth N50 in 2024.
Additionally, every investment comes with a cost known as an “opportunity cost.” You might pass on the chance to invest in Surulere if you decide to invest in Yaba. Or, if you receive a Naira today, you could invest it and earn a profit.
However, if you receive the Naira in the future rather than now, you would lose out on the opportunity to profit immediately. To help you better comprehend this, let me use an example.
How can real estate investors use IRR?
Because it allows for a “apples-to-apples” comparison of two cash flows with various timings of distribution, the IRR is helpful. Investors will either receive a succession of interim rent payments from tenants or no payments throughout a real estate investment. It normally lasts for at least a few years before receiving a larger lump sum once a property is sold.
Investors can also compare real estate investments to other investment options using the IRR.
Investors can determine the profitability of property over other properties or other investment possibilities by comparing the relative value of these cash flows, spread out over several months or years, with other properties. It is crucial to remember that the initial IRR for most real estate investments is merely an estimate based on several assumptions.
Even so, it remains a useful instrument for calculating the yearly return on an investment property. After the investment is sold, the real IRR may be determined.
Investors can also consider additional indicators, such as the cap rate and equity multiple, in addition to IRR when evaluating acquisitions (coming soon).
Why is increasing IRR not always the best option?
The maxim “the bigger, the better” is frequently used (e.g., “a 14 % IRR is better than a 10 % IRR”). However, other considerations typically play a significant influence in investing.
Investors must assess the size or risk profile of the property, and the ROI, even though a higher IRR may initially appear desirable. Needless to say, risks associated with real estate investments, such as occupancy and rental rates, can be challenging to predict.
Here are a few tips for analyzing the rental value
The key to preserving and making money from your investment property is to set the optimum rent. It’s crucial to differentiate yourself from other tenants because each has different needs and preferences. Setting the appropriate rental rate encourages inquiries and draws in tenants of high caliber. You can figure out the rental rate for your investment property with a little study, math, and market knowledge.
Evaluate Rental Properties: How Do I Determine the Worth of My House?
Knowing the value of your property will undoubtedly be a top consideration, whether you are moving to a new house or selling the one you currently live in. How can you be certain of your home’s market value? It is NOT as simple as 1-2-3.
Let’s briefly define true market value before moving on to the phases. Say the market worth of your home is what prospective purchasers are willing to pay for it. You must be aware that several variables will affect how much your home is currently worth. Additionally, the value may alter over time.
Research rental costs. Determine how much rent is being charged for comparable properties in your area. Look for apartments comparable to your home in size, age, upkeep status, number of bedrooms and bathrooms, etc. Make a list of the properties that most closely match yours, then research the rental and occupancy rates for each.
Consider how much you can charge about other prices, considering both the benefits and drawbacks. Always keep in mind that the rental fee mentioned may be excessive. Some landlords charge exorbitant rent for long-vacant properties. Ask property management services for advice: Make sure the company understands estimating the maximum rental value on your home if you choose to engage a property management company to take care of the property.
To find out what you should charge, speak with local agencies and ask about area rental rates. One of the most important skills needed for a property management company is setting the appropriate rent. They can compare the prices of comparable properties and better understand the neighborhood market.
Using regional agents: Real estate agents have a thorough awareness of the neighborhood rental market. They are acquainted with both the occupied and unoccupied rental homes. Using this information, they evaluate the advantages and disadvantages of your home and determine an acceptable rental rate.
Being an agent allows them to interact with various tenants and assess how much each one can afford to pay for a rental property. Although some may, most real estate agents do not work with rents. Therefore, given they frequently specialize in rental properties, you could wish to get in touch with a rental agency or work with a property management firm in your region.
Determine the leasing cost per square foot: If you cannot locate a comparable property, you can calculate the rental value per square foot. Divide the rental amount by the total area in square feet to get the rental cost per square foot. Calculate the rental value of your property by applying the per-sqft rental value from the previous equation.
PlistBooking.com and Rental Properties in Nigeria
We can tell you that this is the most frequent query we receive from clients: “Should I buy or rent a home?” So I decided to get this written up.
One of the primary financial motives for potential buyers to enter the market is to purchase a property to increase equity, but many people also long for the fulfillment of home ownership. Additionally, renting or leasing a property doesn’t necessarily indicate you don’t want to own one. You may want to find the ideal home while renting and saving enough money for it.
Explore our listings today.