When considering the valuation of property for a rental investment, it is essential to consider the long-term prospects of the property. This long view begins, of course, with a valuation of the property, whether it is an REO-to-rental or a foreclosure being purchased as a rental.

In this climate, it is more important than ever to run risk-based valuations of real estate. When assessing a valuation of the property that is going to be rented, it is equally important to understand the rental yield, or rent to value ratio (i.e. 12 months of rent/home price). This is one of the key considerations in attaining a realistic valuation of the rental property.

Much research has been done to evaluate the drivers and the variability of rental yields among markets. Such research provides support for the role of rental yields in investment decisions, but also makes clear that there is no single rental yield that should guide all investment decisions. Here are some factors that lead to variations in the rental yields among markets.

1. Elasticity (like Vegas) means they can add more units. Boston is non-elastic, which would mean if there are more people looking for rentals in Boston rates would go up faster.
2. Subprime Effects Linger The higher current yields are also correlated with the degree of subprime lending and high loan to value (LTV) mortgages as these markets continue to be impacted by a high degree of distress sales holding prices down.
3. Risks Are Correlated with Current Yields The dilemma for investors who wish to take advantage of the new REO sales coming on the market is that the least distressed and most supply constrained markets (which are those where prices are most stable and likely to increase over the next few years) are the most difficult to carry.

You can learn more about valuation of property and Stewart Valuation Intelligence’s valuation solutions in our monthly Home Value Forecast updates. Browse the most recent updates here.