One of the most profitable markets in today’s uncertain economic conditions is real estate. Income from properties is at an all-time high and is expected to go even higher. Therefore, it doesn’t come as a surprise to know that more and more people are interested in investing in the real estate market. Whether you are renting a property, selling or buying it, the first step is always real estate valuation. How can you do anything when you have no idea what it is worth? Therefore, you need to value your real estate, but how can it be done?
There are several approaches that can come in handy for real estate valuation. Discussed below are some of the accurate and best ones:
Sales Comparison Approach
One of the most recognizable approaches used for real estate valuation is the sales comparison approach. In essence, it is nothing but a comparison of similar homes that have been rented or sold in a certain time period. When investors want to highlight the potentially emerging trends in real estate, they usually see a sales comparison approach over a significant time frame. Different attributes are used by this approach for assigning a price value to a piece of real estate. According to Bilal Moti, the MD of Windmills Group, a Real Estate Valuation Company based in UAE, one common metric that’s widely used and is easy to understand is price per square foot. Nevertheless, he adds that this approach is a bit generic because every home is unique and so can be difficult to quantify.
This particular approach is focused on the potential income yielded by the property as compared to the investment made initially. Therefore, it is not surprising to know that commercial real estate investing involves the use of the income approach. As per an expert at North Coast Financial, this approach determines the annual capitalization rate of the investment for valuing the property. The purpose is to know the income the property can generate over time and if it will be enough to justify the investment required.
Capital Asset Pricing Model
A more comprehensive tool used for real estate valuation is the capital asset pricing model. The concept of risk and opportunity cost is applied to real estate investment. It calculates the potential return on investment from a particular property and compares it to other investments that can also be made, especially those that carry no risk. In a nutshell, if the return expected from the real estate property exceeds those of a guaranteed investment, it is a good idea to invest in the real estate property.
According to the cost approach, the value of a real estate property is determined by what it can be used for. This means that the calculation is done by using the land value and any improvements that have been made, minus their depreciation. This method is mostly used for valuing a vacant piece of real estate. This approach has to be used carefully, when working with properties with rapidly changing values, such as real estate property Dubai and Sharjah.
These are some of the popular methods used for real estate valuation. Accurate calculation can enable investors to double their investments in no time at all and earn huge returns in the long term.