The business of real estate is all about acquiring and selling/renting off landed properties. Real estate investors make good returns from this business because it is one of the most reliable investments there is on the surface of the earth. However, this does not mean that one cannot lose money I real estate business. Throwing precautions in the air can cause an investor not to resell the property at the best value, thereby not making the best profit possible. In some cases, lack of precautions can even lead to losing money. To avoid all these, investors should take their time to find out the value of a property before investing in it.
CALCULATING THE INVESTMENT VALUE OF A PROPERTY
The investment value of a property is the fair market value at which it can be sold or bought without any excesses. Before going into a purchase agreement with any property seller, it is important to calculate what that property is worth. For instance, if you (a real estate investor) are to buy an old building which you plan to renovate and sell off, you will have to find out how much it will cost to renovate it up to the standard you want, and how much you will sell it afterwards – and to make sure that it is realistic enough as a fair market value. After that, you can consider, by your own standards, what should be the value of the building, and if you can afford it. Here are some tips on how to calculate the investment value of a property
1. Determine the fair market value (FMV) of the property
2. Evaluate the property using evaluation cost method. This will give you an idea of what it will cost to develop a new building that is similar to what is at hand, and comparing the value to what it will cost to buy it off and renovate it.
3. Calculate the amount if income the property is likely to produce within a given period of time
4. Calculate the annual net operating income. This means to find out the difference between the annual rental income and the annual cost of maintenance.
5. Derive the capitalization rate. This can be done by dividing the annual net operating income by the purchase price.
6. Calculate the cash return and compare it to mortgage payment if you need to factor that out.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.