How to Evaluate your Property for Rent or Sale to Reach the Market Price
Written By House Solution Team
Real estate is one of the lucrative investments world over because demand for those who need shelters is high. At the same time income from these investments is so high that a number of investors in line with this business are on the increase. The burning question is how do you go about evaluating your property for rent or sale? Here is the guideline on how you can value your property to compete on the market.
Sales comparison approach (SCA)
Sales comparison approach is one of the common methods you can use when valuing your real estate. It entails a comparison of similar property (homes for sale or rent) that have previously been sold in a given period of time. As an investor, you would like to see an SCA over a considerable span of time to ascertain the emerging market trends.
Essentially, the SCA relies on attributes to fix a value that is relative to property falling in the same category as yours. The value of your property calculated based on square foot per foot is a simple metric that you as an investor ought to understand better and use it later to arrive at an estimated value of your property.
In simple terms, if a 4000-square-foot penthouse is going for let's say $2 per square foot, you should look forward to receiving an income within that range provided that similar property in the same area is valued that way.
You should always remember that SCA is normally generic. It means that each home for sale or rent has some element of uniqueness that cannot always be quantifiable. This is true if you realize that buyers and sellers have varied tastes and preferences in what they are looking for. As such, you get to know that SCA is just but a baseline or an opinion that you should not assume to be a perfect way to predict or value your property.
Alternatively, you can reach out to certified appraisers or the real estate agents whenever you want to request for a comparative market analysis. This an important step to take in order to minimize fraudulent appraisal risks that were a common thing sometimes back in real estate crisis of 2007
Capital Asset Pricing Model
Capital asset pricing model (CAPM) is a little bit comprehensible method you can use to value your property. It introduces risk and opportunity cost concepts in relation to the real estate.
In this method, you will be required to look at the possible return on investment (ROI) which you derive from the rental earnings and compare the amount to other investments that are not risky as far as real estate is concerned. Look at the example below based on the formula that is used to calculate the return of your asset with its possible risk:
The main concept with CAPM, in this case, is that an investor needs two kinds of compensation. These are; time value of money as well as the risk. The formula above shows the risk rate as a representative of the time value of money. It, therefore, compensates for the potential property owner for any form of investment over a given period of time.
In short, when an expected return on the risk-free investment is more than the return on investment (from rental income), no financial sense is made here to embark on taking the risk of your rental property. For instance, the property for sale is never similar but the location and the time the property has been in the market are important factors to consider. The two factors will determine the cost of maintenance and safety of the buyer or tenants respectively. For that reason, CAPM enables you to determine the returns on your investment when you put your money at risk.
The income approach targets potential income from rented premises in relation to your investment. If you are in the commercial real estate, income approach is good for you.
The income approach depends solely on yearly capitalization rate for your investment. The rate in question is a projection of the annual income (gross rent) multiplier which is then divided by the prevailing value of your property.
For instance, if your rental house costs, $100,000 to buy and your anticipated monthly rental income are $ 1000, you can work out your annual capitalization rate this way:
12,000 ($ 1000 x 12 months)÷$100,000=0.12 or 12 percent
The above example is simply based on the assumption that there is no interest expenses imposed on the mortgage. In addition, the future income from the rent may be a little bit less or more compared to the current rental income.
The cost approach is used to determine the value of your real estate in connection to the purpose your property is intended for. The value is estimated by combining the land value with the depreciation value based on any improvements. In this case, the appraisers use the principle of “highest and the best" to make a summary of the coast approach regarding your real estate. The method is commonly applied to find the value of a vacant land as illustrated below:
This implies that if you are planning to purchase a barren land to develop apartments, the real value of that land will be determined by how best you are going to use that land for your project. Taking this case scenario into account where you wish to buy land near an oil field, the best way to utilize that land is not constructing apartments but probably, use it to expand drilling rights with the aim of discovering more oil.
On the other hand, property zoning could be another factor when determining the value of your property. If not zoned for residential purposes, it is likely that its value will go down due to the expenses the developer will incur to zone it. This kind of property is recommended for newer projects rather than older properties.
Having first-hand information on these methods, you as the owner of the property can comfortably have a bargaining power based on any of the methods discussed above. At this moment, you should be one step in the right direction to venturing into the real estate business without worries.
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