How to Effectively Assess Property Value for Investment
Real estate investment retains the twin traditional appeals of stability and an almost guaranteed return, but there have been a lot of innovations in recent times that have made it even more worthwhile. The ability to access and analyze data more comprehensively makes it easier to make informed decisions and invest in a diverse range of vehicles. 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. 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 essentially means comparing the sales prices of similar properties in order 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 in which it is located, 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 into public records to find what amounts have been agreed for those properties.
The Capital Asset Pricing Model
This model takes a big-picture approach to investing and attempts to determine if the risk you’re taking on by acquiring a property is the most judicious use of your funds. You can do this my modelling what your returns would be in different investment vehicles, especially ones that have little or no risk, such as United States Treasury Bonds or Real Estate Investment Trusts (REITs).
Once that's done, you’ll need to calculate the potential rental income and then see what buying price would enable you make more returns than the alternatives. That would then be the value of the property to you, and although it might be vastly different from the seller’s perspective, it’s what you’ll have to work with if you’re to make worthwhile profit from your investment.
It’s also crucial to factor in potential outlays like essential renovations, which can be great investments in themselves. Sean Hayes, general manager of kitchen-and-bath retailer Hausera, confirms that, "We found that homeowners spent an average of $12,800 for their kitchen renovation, $11,100 for their bathroom and $10,800 for their laundry room, and the returns on those investments in terms of increased home value were very significant.”
The Cost Approach
The cost approach involves the estimation of how much it would cost to rebuild the property from the ground up, although there’s often a modification in that the estimate is done by using costs for modern construction materials and processes. This is the preferred method with a special-use property, for which it’s 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 commomn 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.