Real estate investment is one of the surest industries you can put your money, and be guaranteed that you will continue eating from the same bucket in the long run.
Today things and times have changed; we have big data in real estate and other technology that is being used to analyze data about an investment.
Not all real estate development is worth your money, while there are some investments where you should rush to put your money. How do you determine which real estate investment will be great to invest in? How do you value real estate investments?
Here are the best ways to value a real estate investment.
The Capital Asset Pricing Approach:
This is a model where you have to compare the real estate you are about to invest in, with other investment vehicles, you could put the same money. There are several investments with low risk that you could put your money in, such as treasury bonds or stocks.
Using the capital asset pricing model, you have to determine how much more you will need to spend in a real estate investment to make more rental income than the alternative low-risk investment you could have done.
You also have to factor in the value of renovating the investment.
John Stones, a major renovator from Boston, Massachusetts, said in an interview, “Homeowners spend an average of $12,000 on kitchen renovations, and $11,000 on bathroom renovations.”
These are costs that you should factor in while valuing the investment. Even before talking to the home seller, you should know the value of the investment by its ability to make more rental income than the low-risk alternatives.
The Cost Model:
This is a method where you will have to determine the value of a property by estimating how much money it would cost to build the property from the ground up.
You should make the estimation putting into consideration that modern building material may cost different.
Also, You need to factor in the value of the land where the property is; you also need to determine what other purposes can the land be used to generate maximum rental income.
In the future, you might need to sell your home or investment, so you also need to take into account the rate of depreciation for the property.
The Sales Comparison Model:
This is the most common approach for estimating the value of a property. This is where you have to look at similar real estate investments and determine the value of the target investment by comparison.
The comparison goes beyond the type of property to the locality, interior and exterior designs, fittings, and the service reviews of the property.
You should note that most real estate investors make the mistake of asking the prices, which can never give you the real value for the property.
You need to stop looking at the brochures because they are advertising the investment; they cannot show the flaws of the investment, conduct thorough research, and look at the public records to see the value that was initially agreed for the property and other similar properties.