Understanding Rental Property Appraisals: A Complete Guide for Rental Property Owners

When it comes time to buy a new investment property, the bank’s appraisal can make or break a deal. If the property is appraised too low, your financing might fall through. In other cases, the bank might approve the loan but require new contingencies, such as a higher down payment—putting you on the spot to fill the gap.

Sellers need to be equally concerned about their property’s appraised value. A low home appraisal can drastically affect one’s ability to sell the property, particularly to someone who plans on financing the deal instead of paying for it in cash.

Rental property investors tend to pay a lot of attention to what’s happening in the capital markets. What will happen to interest rates? Will new construction affect pricing? All of this definitely matters—but too often, the importance of a strong appraisal gets lost.

Here’s what you need to know about home appraisals, including how the evaluator determines the property’s value and what you can do to set the stage for getting the best possible rental property appraisal.

What is a Rental Property Appraisal?

An appraisal is the act or process of developing an opinion of value. The valuation process is a systematic procedure that an independent appraiser follows to answer a client’s question about real property value (usually, market value). A rental property appraisal is also commonly referred to as a “property valuation.”

It is important to note that the appraised value is different from the assessed value. The assessed value is determined by the municipality in which the property is located and can be drastically lower than the appraised value.

When Would You Need an Appraisal?

A rental property appraisal is needed whenever a person is financing the purchase of a property or when an owner is looking to refinance. Someone might also have an appraisal done before listing their property for sale to determine a fair listing price; this is particularly helpful if the property is unique and no local comps are available. Appraisals are commonly required during estate sales and divorces, and they can also be used to determine tax liabilities.

Who Conducts a Rental Property Appraisal?

Most states require appraisers to be licensed or certified. Appraisers have been specially trained to develop independent opinions of value. If an appraisal is required as a condition of your loan (whether you’re purchasing or refinancing), the bank will initiate, hire, and oversee the appraisal. Regulations prohibit Fannie Mae and Freddie Mac lenders from having direct contact with appraisers, so most banks will initiate the appraisal through an appraisal management company that has a pool of appraisers from which to draw.

If you’re getting an appraisal done to establish the home’s value before you sell, you can hire the appraiser directly.

What is Fair Market Value?

Fair market value represents the price at which a property would likely sell in the current market, considering factors such as location, condition, and recent comparable sales. It's a core concept of rental property appraisals as it reflects the true market conditions at any given time. For rental property owners, fair market value plays an important role in setting rental rates, refinancing, or determining the selling price.

How Fair Market Value Affects Rental Properties

Fair market value directly impacts rental property owners. A well-conducted appraisal that accurately reflects fair market value helps you keep your property competitively priced in the market. This can affect rental income, tenant turnover, and the overall financial health of your investment. Understanding fair market value helps rental property owners make informed decisions about their assets, whether they are buying, selling, or refinancing.

The Rental Property Appraisal Process: A Step-by-Step Guide

Understanding the rental property appraisal process will help rental property owners looking to maximize their property's value. This step-by-step guide will walk you through each stage of the appraisal, from preparation to the final report. By knowing what to expect and how to prepare, you can take proactive steps to promote a favorable outcome that accurately reflects your property's true market value.

Step 1: Preparing for the Appraisal

Preparation is key to achieving a favorable appraisal. Rental property owners should gather all necessary documents, such as lease agreements, maintenance records, and recent property improvements. Making minor repairs and upgrades before the appraisal can also positively influence the property's value. Keeping the property clean, well-maintained, and presented well both inside and out helps to leave a positive impression on the appraiser.

Step 2: The Appraisal Inspection

During the appraisal inspection, the appraiser will evaluate the property's overall condition, focusing on key areas such as structural integrity, quality of finishes, and the state of any tenant-occupied areas. The exterior of the property, including landscaping and curb appeal, will also be assessed. The neighborhood’s characteristics, such as proximity to amenities and overall market demand, will influence the final home appraisal value.

Step 3: Analyzing Comparable Properties

Appraisers use comparable properties, or "comps," to determine the property's market value. Comps are recently sold properties in the same area with similar characteristics to the one being appraised. The appraiser will adjust the value based on differences between the subject property and the comps, such as size, condition, and features. For rental properties, the appraiser will also consider rental rates and occupancy levels of comparable properties.

Step 4: Reviewing the Final Appraisal Report

The final appraisal report will provide a comprehensive overview of the property’s value, including the methods and comps used to reach the conclusion. Rental property owners should carefully review this report to understand the factors that influenced the appraisal. If there are discrepancies or concerns, this report will serve as the foundation for any potential challenges to the appraisal.

Factors That Influence a Property’s Appraised Value

There are certain factors that influence a property’s appraised value, including local market conditions (basic supply and demand) and macroeconomic trends (like a national recession). The principles of substitution, balance, and externalities can also help explain shifts in value.

1. Local Market Conditions

Local market conditions play a significant role in determining a property’s value. This includes the basic principles of supply and demand—when there are more buyers than available properties, prices tend to rise, and vice versa.

For rental properties, high demand for rental units in your area can positively influence the appraisal. Additionally, factors like local employment rates, population growth, and the overall economic health of the region contribute to market conditions and affect appraised values.

2. Comparable Property Sales (Comps)

Appraisers rely heavily on the sales comparison approach, which involves analyzing recent sales of similar properties in the area, known as comparables or "comps." The characteristics of these comparable properties—such as size, location, age, condition, and amenities—are compared to the subject property. The appraiser adjusts the value of your property based on differences between it and the comps. For example, if your rental property has more modern amenities or is in a better location than the comps, these factors can boost your appraisal.

3. Property Condition and Maintenance

The physical condition of your property is a major factor in the appraisal. Well-maintained properties with recent upgrades, such as new roofing, updated HVAC systems, or renovated kitchens and bathrooms, generally receive higher home appraisals. Conversely, properties with visible signs of wear and tear, such as outdated fixtures, peeling paint, or structural issues, may see their appraised value reduced. Regular maintenance and timely repairs help to maintain and enhance your property's value.

4. Rental Income and Occupancy Rates

For rental properties, the appraiser will consider the income-generating potential of the property. This includes the current rental income, historical income trends, and occupancy rates. Properties with stable, long-term tenants and strong rental income streams are likely to receive higher appraisals.

On the other hand, properties with high vacancy rates or inconsistent rental income may be appraised at a lower value due to perceived risks associated with future income stability.

5. Neighborhood and Location

The location of your property has a substantial impact on its appraised value. Appraisers consider the overall desirability of the neighborhood, including factors such as proximity to schools, parks, public transportation, shopping centers, and employment hubs. Additionally, the appraiser will assess the neighborhood's safety, general upkeep, and future development plans. For rental properties, being in an area with high tenant demand and low vacancy rates can positively influence the appraisal.

6. Economic and Environmental Factors

Macroeconomic trends, such as national economic performance, interest rates, and inflation, can influence property values on a broader scale. In addition, environmental factors, including natural disasters, climate change, and proximity to hazardous areas (e.g., flood zones or industrial sites), can also impact a property's appraised value. Rental properties in regions prone to natural disasters may see lower appraisals due to potential risks and higher insurance costs.

7. Unique Features and Amenities

Any unique features or amenities that your property offers can increase its appraised value. This might include energy-efficient appliances, solar panels, upgraded security systems, or luxury amenities like a pool or a high-end fitness center. For rental properties, features that appeal to tenants—such as on-site laundry facilities, pet-friendly policies, or dedicated parking spaces—can add value in the eyes of the appraiser.

8. External Influences and Planned Developments

External factors such as nearby construction projects, changes in zoning laws, or upcoming infrastructure improvements (like new public transportation options) can influence property values. For instance, if a new transit line is planned near your rental property, the increased accessibility may lead to a higher appraisal. Conversely, if a large commercial development is planned that could increase noise or traffic, this might negatively impact the appraised value.

Tips for Rental Property Owners to Influence the Appraisal

As a rental property owner, you have the ability to influence the outcome of your property's appraisal. By taking certain proactive steps, you can affirm that the appraised value reflects the true potential of your investment.

Maximizing Curb Appeal

First impressions matter. Enhancing your property's curb appeal by maintaining landscaping, painting the exterior, and making necessary repairs can positively influence the appraisal. Simple improvements like cleaning walkways, planting flowers, and keeping the property well-cared for can make a big difference.

Documenting Upgrades and Maintenance

Keep a detailed record of all upgrades and maintenance work completed on the property. Documenting these changes with before-and-after photos, spreadsheets, and receipts provides the appraiser with concrete evidence of the property's improvements. This documentation can help justify a higher appraisal value.

Providing Relevant Financial Information

Make sure the appraiser has access to all relevant financial information, such as current rental income, occupancy rates, and operating expenses. This information helps the appraiser assess the property's income potential, which is particularly important for rental properties.

Highlighting Unique Features

If your property has unique features that set it apart from others in the area, make sure the appraiser is aware of them. Features such as energy-efficient appliances, recent renovations, or high-demand amenities can add significant value to your property.

How to Challenge an Appraisal

If you feel that the appraisal is unfairly low, you are well within your right to challenge the appraiser’s analysis. Grounds for challenging an appraisal may include information about the property that is incorrect; or your ability to produce comps from the area that are more recent, closer, or more comparable overall than those used in the appraisal report. You might also challenge an appraisal if only one approach was used, and you feel that an alternative approach would have yielded a much different result.

It’s ultimately up to the bank to determine whether or not your challenge has merit. The bank may entertain a second home appraisal but will usually require you to cover the cost of hiring someone else. Having to pay the fee upfront may seem unfair, but if it’s going to result in a better appraisal, it may be worth it. If the two appraisals turn out to be much different, your lender will likely take the average of the two. In some cases, though it’s uncommon, a bank might suggest getting a third appraisal and will take the middle value of the three.

How Professional Property Management Can Help Improve Your Appraisal

Professional property management can significantly enhance a property’s appraisal by guaranteeing that the property is well-maintained, financially stable, and appealing to both tenants and appraisers.

Experienced property managers handle regular maintenance, promptly address repairs, and coordinate upgrades that improve the property's condition, which directly impacts its appraised value. They also maintain detailed records of income, expenses, and improvements, providing helpful documentation that appraisers consider when determining value.

Additionally, property managers optimize tenant occupancy rates and promote consistent rental income, which is especially important in the income capitalization approach to appraisals. Their market knowledge allows them to highlight unique property features and neighborhood advantages, further boosting the appraisal.

You can find a property manager to help oversee your rental property and improve your appraisal easily. Our helpful search tool can help you find the best property managers in your area.