Investment Property Valuation

The best way to evaluate the risks of purchasing property for investment

As an investor you will want to make money on your purchases.

Therefore, your prime objective when looking for property is to estimate the fair market value as accurately as possible.

To ensure yourself the best chance of success you will need to understand how the value has been arrived at.

How is an Investment Property Valuation Calculated

The ‘market value’ is what other similar properties have have sold for.

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Where the ‘fair market value’ is calculated by taking into consideration the highest price that a ready buyer is likely to pay and the lowest price a ready seller would be willing to accept for a property.

Because an investment property is not a property you will be living in, the appraisal will also be based around ‘income analysis’ and helps give the potential value of the property to the investor.

Appraiser’s and Valuers use these combined methods to calculate the value of the property.

What is the Income Analysis method?

The income-analysis method of appraisal aligns the value of a property to the income it is expected to produce.

In simple terms there are two basic techniques that can be used to arrive at this. One is the ‘gross rent multiplier’ or GRM, and the other is the ‘capitalization rate’.

To ascertain each of these results, data needs to be gathered from like properties in the area.

The Gross Rent Multiplier explained

The GRM is often used for assessing the expected income of properties such as one-family homes or small blocks of family units.

A suitable sales price is calculated for the investment property by taking its probable monthly rental income (if all units are rented and everyone is paying on time) and comparing it against monthly rental income of similar properties (this will give an indication of rent lost due to vacancies, tenants in arrears etc) recently sold in the area.

The market price of these similar properties will then go toward calculating the investment property’s fair market price.

The Capitalization Rate explained

The capitalization rate is slightly more complex (mostly due to the high amount of different incomes often generated by a commercial building) and typically saved for calculating the fair market price of properties such as office buildings shopping centres and large apartment blocks.

Put simply, an expected return – estimated by looking at what is being generated by similar investment properties in the area – is calculated and the fair market value is based around these figures.

Of course, there are many variables, especially when you delve into the purchase of commercial retail property – not to mention the added considerations that are an integral part of most investment undertakings, such as asset valuation, investment appraisal, portfolio management and tenant/landlord agreements.

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