3 Approaches To Value Property for Investment

Keyphrase: 3 Approaches To Assess Property Value Before Investment

The benefits of investing in Real estate is traditionally twin: Stability and a 95% guarantee on return. But there have been a lot of innovation in recent times to make real estate investment more attractive. But however you intend to invest in property, you will need to learn how to value before investing.

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Here are the best ways you can do that efficiently and accurately.

1. The Sales Comparison Approach

This is the most common approach adopted by investors. It essentially means comparing sales prices of similar property to determine what a reasonable price is for the one you’re considering. As usual though, there are nuances aplenty. First, the similarity must extend beyond the type of property to the neighborhood it is located in. And then its age, interior and exterior features, size, fittings and a plethora of other considerations.

It’s also important to note that looking at sales prices is a common mistake to avoid. Asking prices and value are not the same thing. You’ll need to go beyond looking at brochures and actually conduct research on ground.

2. Assess Using Capital Asset-Pricing Approach

This model takes a big-picture approach to investing. Here, you are trying to determine if the risk is worth taking. You can do this by modelling what your returns would be in different investment vehicles, especially ones that have little or no risk.

Once that’s done, you calculate potential rental income and see what buying price would enable you make more returns. That would then be the value of the property to you. Note that this value may be vastly different from the seller’s valuing. It will therefore give you a figure to work with in negotiating before buying.

It’s also crucial to factor in potential costs like renovations, extra charges, costs of upgrade and so on.

3. The Cost Approach

The cost approach involves the estimating how much it would cost to rebuild the property from ground up. Often, this value will be different from the value of the seller. This is because cost of rebuilding will be different from cost of building. But this is the preferred method with a special-use property. And that’s because it’ll be difficult to find direct comparisons.

The procedure is to estimate the value of the land, assuming it were vacant. This can be done by considering the sale prices of similar pieces of land. Another factor that must be taken into consideration is what the best use of the land would be and how that would factor into a potential sale price. Next, you’d need to estimate the cost of constructing the building or buildings on the property. You could get a more accurate figure by finding the cost of each component and summing them up, but it’s usually more efficient to get an estimate per square foot for a similar building and then multiply by the size of the target property.

Lastly, you’d need to consider depreciation to factor in how much the value of the property would have reduced over its lifespan. This is usually done using the age-life method, which assigns a potential lifespan and deducts a percentage based on how far along that lifespan the property is.

 

Ultimately, you have a range of choices when it comes to valuing property for investmemt purposes. The common key is to ensure that you feed in as much accurate data as you can, helping you make better informed decisions on the path to growing your portfolio and profits.

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