Property Assessment And Property Appraisal Methods For Accurate Valuation – Accurate real estate appraisals can help investors make better decisions about buying and selling real estate. Investors must be knowledgeable about how to value their property and how much they can each earn from property appreciation, rental income, or both.

Real estate investing is not usually a short-term business, so analyzing cash flow and subsequent rates of return is critical to achieving profitable investment goals. Discounting future net operating income (NOI) at the property’s appropriate discount rate is similar to the discounted cash flow (DCF) valuation of a stock. The gross income multiplier model of compounding real estate can be compared to the relative increase in the value of a stock.

Property Assessment And Property Appraisal Methods For Accurate Valuation

One of the most important assumptions a real estate investor can make when valuing a property is choosing an appropriate capitalization rate, known as the cap. This is the required rate of return on the property minus depreciation. Simply put, it is the rate applied to NOI to determine the current value of the property.

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For example, let’s say the property will generate $1 million in NOI over the next ten years. If discounted at a capitalization rate of 14%, the market value of the property is:

7 , 142 , 857 dollars ( 1 , 000 , 000 0.14 ) where: Market value = Net operating income / caprate begin&$7, 142, 857bigg(fracbigg)\&textbf\& text= text/}end $ 7 , 142 , 857 ( 0.14 $ 1 , 000 , 000 ) Where: Market price = Net operating income / caprate

With a market value of $7,142,857, it’s selling for $6.5 million, a good deal. But if the sale price is $8 million, it’s a bad deal.

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Determining the capitalization rate is one of the key metrics used to evaluate income-producing real estate. Although a little more complicated than calculating a firm’s weighted average cost of capital (WACC), there are several methods investors can use to find the appropriate amount of capital, including the following.

One common way to calculate the amount of restrictions is the accumulation method. Starting with the interest rate, add the following:

With an interest rate of 6%, default rate of 1.5%, redemption fee of 1.5%, and risk level of 2.5%, the equity capitalization rate is 11.5% (6% + 1.5% + 1.5% + 2.5%). If the net operating income is $200,000, the market value of the property is $1,739,130 ($200,000 ÷ 0.115).

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This calculation is very simple. However, the complexity lies in evaluating the accurate estimates of the individual components of capitalization, which can be challenging. The advantage of the capitalization method is that it tries to determine and accurately measure the discount rate on a case-by-case basis.

The market extraction method assumes the availability of current, available NOI and sales price data for comparable income generating properties. The advantage of the market extraction method is that the capitalization rate makes direct income capitalization more meaningful. Determining the amount of capitalization is relatively simple.

Let’s say an investor can buy a parking lot with a potential profit of $500,000 in NOI. There are currently three similar revenue car parks:

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Considering the cap for these three similar properties, a total of 9.24% is a fair representation of the market. Using this capitalization rate, an investor can determine the market value of the asset he is considering. The opportunity cost of the parking lot investment is $5,411,255 ($500,000 / 0.0924).

In the pooled investment method, capitalization rates are calculated using individual interest rates for properties that use both debt and equity financing. The advantage of this method is the ideal capitalization rate for the financed real estate investment.

The first step is to calculate the sinking fund factor. It is the rate that must be produced in each generation to reach a certain level in the future. Assume a $950,000 NOI property with 50% debt at 7% interest and amortized over 15 years. The rest will be paid from equity with a 10% rate of return. The landing fund coefficient is calculated as follows.

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It is 3.98%. The rate payable by the lender is equal to this sinking fund factor

Therefore, the weighted average interest or total capitalization rate using a weighting of 50% for debt and 50% for equity is:

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Absolute valuation models determine the present value of future cash flows to obtain the intrinsic value of an asset. The most common methods are the dividend discount model (DDM) and discounted cash flow (DCF) methods.

On the other hand, relative value methods suggest that two comparable securities are valued at the same price based on their yield. Price-to-earnings (P/E) and price-to-sales ratios are compared to other companies in the industry to determine whether a stock is undervalued or overvalued.

As with property appraisals, real estate appraisal analysis should employ two procedures to determine a possible price range.

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Market Value = N O I 1 r − g = N O I 1 R Where: N O I = Net Operating Income r = Required Return on Real Estate g = Growth N O I R = Capitalization Rate ( r − g ) begin&text=frac= frac &NOI =f text\&r=text\&g=textNOI\&R=text(r-g)end MarketValue = r − g NE I 1 = R NE I 1 where: NE I = Net operating income r = Required return on real estate g = NO I growth R = Capitalization rate ( r − g )

NOI reflects the profit earned by a property after accounting for operating expenses, but before taxes and interest payments are deducted. However, before deducting expenses, the total return earned on the investment must be determined.

Expected rental income can be predicted based on comparable properties in the area. By doing proper market research, an investor can determine what rents are being paid in the area and assume that a similar rent per square foot can be paid for this property. Expected rent growth is calculated using the formula growth rate.

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Analyzing the value of real estate investments is similar to fundamental analysis of stocks. Property valuations are usually done using two main methodologies: absolute value and relative value. The same applies to real estate appraisals.

High vacancy rates can threaten real estate investment returns, so use sensitivity analysis or realistically conservative estimates to determine lost revenue if assets are underutilized.

Operating costs include costs directly incurred in the day-to-day operation of the building, such as property insurance, management fees, maintenance costs, and operating costs. Note that depreciation is not included in the total cost calculation. Real estate net operating income is similar to earnings before interest, taxes, depreciation, and amortization (EBITDA).

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Discounting real estate investment NOI with a cap is like discounting future dividend streams at the appropriate required rate of return adjusted for dividend growth. Equity investors familiar with dividend growth models should immediately see the similarities.

The gross income multiplier method is a relative valuation method based on the basic assumption that properties in a given area will grow by the amount of gross income they help generate. As the name suggests, gross income is the total income before deducting any operating expenses. However, to make an accurate estimate, the vacancy rate needs to be predicted.

For example, when a real estate investor buys a 100,000 square foot building, the average monthly income per square foot is roughly $10. Although an investor may initially assume an annual gross income of $12 million (10 x 12 months x 100,000 square feet), the building is likely to have vacant units at any given time.

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Assuming 10% vacancy, total annual revenue is $10.8 million ($12 million x 90%). A similar approach is used in the net operating profit approach.

The next step in real estate valuation is to determine the gross income multiplier and multiply it by the gross annual income. The gross revenue multiplier can be found using historical sales data. By looking at the sales price of comparable properties and dividing that value by the gross annual income, you get the average multiplier for the area.

This type of valuation method is similar to using comparable transactions or multiples to value a stock. Many analysts predict a company’s earnings by multiplying its earnings per share (EPS) by the industry’s P/E ratio. Real estate appraisals can be done the same way

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