Today’s economic world offers plenty of investment models, cryptocurrency, stocks, startups, etc nonetheless the real estate investment remains his position as a trustworthy investment vehicle. The indisputable advantage of real estate investment is the preservation of the twin traditional appeals of stability and a practically guaranteed return, but there have been a lot of innovations in recent times that have made it even more valuable. The simplicity to access and analyze data in a more comprehensive way makes it easier to make intelligent decisions and invest in a diverse range of vehicles. Whichever investment method you choose, nevertheless, you’ll always 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 precisely.
The Sales Comparison Approach
This is the most conventional approach adopted by real estate investors, and it’s essentially about comparing the sales prices of similar properties in order to define what a rational price is for the one you’re envisaging. As usual, though, there are nuances abundantly. First, of all, the similitude must expand beyond the type of property to the quarter 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 conception. You’ll need to go beyond looking at brochures and actually perform research into public records to find what amounts have been agreed for those properties.
The Capital Asset Pricing Model
This model is used to take a big-picture approach to invest and attempts to define if the risk you’re taking on by obtaining a property is the most sagacious use of your capital. You can do this by modeling what your returns would be in various investment vehicles, particularly 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 revenue and then see what buying price would allow you to 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 a worthwhile revenue from your investment.
It’s also axial to factor in potential outgoings 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 necessitates the appreciation of how much it would cost to reconstruct 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 by real estate investors with a special-use property, for which it’s difficult to find direct comparisons.
The procedure is about to estimate the value of the land, assuming it was vacant. This can be done by considering the sale prices of similar pieces of land. Another factor that must be taken into account is what the best use of the land would be and how that would impact the 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.
Finally, you’d need to consider devaluation to factor in how much the value of the property would have reduced over its lifetime. This is essentially 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.
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