Reasons for property valuations Source: The Verkehrswert is defined as the price which, at the time to which the assessment refers, would be attainable in normal business dealings, in accordance with the legal circumstances and actual characteristics, the particular state and situation of the property or other object for valuation, without regard to unusual or personal circumstances. Furthermore it is important to consider the fact that the value of a property is not necessarily its price.
Rents are offering increasing revenue streams. But before getting into the real estate rental game, how does one go about making evaluations?
The Sales Comparison Approach The sales comparison approach SCA is one of the most recognizable forms of valuing residential real estate. This approach is simply a comparison of similar homes that have sold Methods of rental valuations economics essay rented over a given time period.
Most investors will want to see an SCA over a significant time frame to glean any potentially emerging trends. The SCA relies on attributes to assign a relative price value.
Price per square foot is a common and easy to understand metric that all investors can use to determine where their property should be valued. Buyers and sellers have unique tastes and differences. The SCA is meant to be a baseline or reasonable opinion and not a perfect predictor or valuation tool for real estate.
It is also important for investors to use a certified appraiser or real estate agent when requesting a comparative market analysis. This mitigates the risk of fraudulent appraisals, which became widespread during the real estate crisis. The CAPM introduces the concepts of risk and opportunity cost as it applies to real estate investing.
This model looks at potential return on investment ROI derived from rental income and compares it to other investments that have no risk, such as United States Treasury bonds or alternative forms of investing in real estate, such as real estate investment trusts REITs.
With respect to risk, the CAPM considers the inherent risks to rent real property. For example, all rental properties are not the same. Location and age of property are key considerations.
Renting older property will mean landlords will likely incur higher maintenance expenses. A property for rent in a high-crime area will likely require more safety precautions than a rental in a gated community.
This model suggests factoring in these "risks" before considering your investment or when establishing a rental pricing structure. CAPM helps you determine what return you deserve for putting your money at risk.
The income approach is used frequently for commercial real estate investing. The income approach relies on determining the annual capitalization rate for an investment. More than likely there are interest expenses on a mortgage. Also, future rental incomes may be less or more valuable five years from now than they are today.
Many investors are familiar with the net present value of money. Dollars received in the future will be subject to inflationary as well as deflationary risk and are presented in discounted terms to account for this. The Cost Approach The cost approach to valuing real estate states that property is only worth what it can reasonably be used for.
It is estimated by combining the land value and the depreciated value of any improvements. Appraisers from this school often espouse the "highest and best" use to summarize the cost approach to real property. It is frequently used as a basis to value vacant land.
For example, if you are an apartment developer looking to purchase three acres of land in a barren area to convert into condominiumsthe value of that land will be based upon the best use of that land. If the land is surrounded by oil fields and the nearest person lives 20 miles away, the best use and therefore the highest value of that property is not converting to apartments, but possibly expanding drilling rights to find more oil.
Another best use argument has to do with property zoning.The Student Leadership Council from Ogeechee Technical College, recently partnered with the American Red Cross of Southeast and Coastal Georgia to hold a blood drive on the College’s main campus.
daily speculations the web site of victor niederhoffer: dedicated to value creation, ballyhoo deflation and applying the scientific method in finance.
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