From a quantitative perspective, real estate investing is somewhat likened to investing in stocks. A large number of real estate investors are able to live substantially with income from property investments.However, not every investment yields profits for the investor.
To profit, investors must know how to value real estate and make educated assumptions about how much profit each will make. The capability to access and analyze data effectively makes it easier to make decisions and diversity invest .
Whichever investment method you choose, however, one constant is that you’ll need to value properties as you work to decide where to put your money. Market value, replacement cost, capitalization rate and cash on cash return figures help an investor determine the viability of the investment. Here are the best ways you can do that efficiently and accurately.
- The Sales Comparison Approach:
This is the most common approach adopted by real estate investors and it simply means researching the price of a property and comparing the selling price of a similar property in order to ascertain what a reasonable price is for the one being considered. These similarities go beyond the neighborhood in which it is located, the property type, size and a host of others.
It is also pivotal to note that researching on sales price is an avoidable common mistake. The asking price and the value of a property are not the same. Conducting a research into both terms is very important and it goes way beyond simply viewing brochures.
- Evaluate the property Using replacement cost method:
What happens in this approach is basically asking, “ What is the estimation of how much it would cost to rebuild the property from the ground up?” Replacement costs are determined by using costs for modern construction materials, processes and labor plus the value of the land, minus any depreciation.
It is Important to note that this valuation technique is preferred with a special-use property or those without recent comparable. This approach is to evaluate the worth of the property, supposing it were vacant. This can be done by taking into consideration the sales price of similar pieces of land.
- The Capital Asset Pricing Model:
This model is somewhat like the long run approach to investing and trying to establish if the risk taken on by purchasing a property is the most prudent use of funds.Calculate the Capitalization Rate by dividing the Annual net Operating Income from previous step by the purchase price or market price.
The capitalization rate for investment properties is typically between 5 percent and 8.5 percent. Compare properties using capitalization rates to determine the best value.
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