Effective Property Valuation Methods

Knowing the value of a property is vital for any investor, especially one keen on forecasting profits from their real estate investment. When investors how much a property is worth and what it will cost to maintain it, they can work out how much to expect if they invest in it. As those in the industry – such as Razi Salih, an experienced real estate investor with properties in northern Europe – will know, determining the value of a property can be approached from multiple angles. 

Part of the reason why various assessment methods exist is that the value of property shifts depending on various factors. As a result, an investor needs to understand the options available and choose accordingly. 

The Sales Comparison Method 

The sales comparison approach is one of the more common methods used by property investors. Individuals who use this approach compare the sales prices of similar properties to figure out a suitable price for the asset at hand. Generally, this approach seems simple, but investors have to consider multiple factors beyond similarity. For example, they also have to consider the property’s location, age, and features. 

While this approach can be a quick way of assessing value, it's also one of the pitfalls investors are encouraged to avoid. Sales prices and property values are not the same thing, and as a result further research will be required. 

The Cost Approach 

The cost approach considers the property's value as the total cost of constructing the property afresh, while also considering the cost of the land. Depreciation is considered in estimating the costs, while additional aspects involve estimating construction costs using modern building materials and processes. The cost approach is suitable when assessing properties that are used for special purposes, including hospitals, schools or government buildings, for which a direct comparison is hard to find.  

The value of the land assumes it is vacant, with the approximate value found by studying sales of land that are similar in size and location. The cost of constructing the building(s) can be estimated by summing up the costs of each component used, or by using the cost per square foot. Depreciation of the property is factored into the valuation and considers the lifespan of the property. 

The Income Approach 

The income approach considers the reasonable rate of return an investor is looking for and the net income that a property will give. Often, this method is used when assessing properties used for income-generating purposes such as shopping malls, office buildings and residential apartments. Assessments done using this approach can be relatively easy when the property in question has predictable expenses and is expected to produce future income.