It is important to understand how one can get the value of real estate when you find yourself in the position of having to purchase the next home, business, or rental investment property. Understanding the value of the property will enable you to measure the amount you want to make the purchase.
This guide will highlight what property valuation is, how one can be done on a house or any property, and why everyone out there hunting for the property should consider the value of the property that they intend to buy. So let’s get started.
What Is a Property Valuation?
When you are looking to buy a home, for example, an apartment or even a terrace, the cherry on top of all is a ‘hard-to-price’ property. We should know not only what the property is worth but also how much it will cost us later on (depreciation rates, etc.) before making such purchases.
Once you have determined the value of a property using a given evaluation method, reflectors like location, size, facilities description, and comparable within neighborhoods’ recent sale prices are needed for good appraisal of properties.
How to Calculate Property Valuation
There are different ways to calculate house price growth, including:
Sales Comparison Method
Used by many house value growth calculators, this method of property valuation involves comparisons of similar properties that have been sold in the recent past within the same locality. Nonetheless, to find out the value of a certain property, appraisers will take a scan through similar properties in the same size, location, and characteristics in the same property condition.
For instance, if three similar houses in an area are sold for $260,000, $280,000, and $300,000, this method will use the value of $280,000 to determine the value of similar houses in the same locality.
According to recent stats, the total value of residential plots in Australia has increased by $225.9 billion to $10,911.8 billion this year. The sales comparison approach is very helpful in understanding how much the buyers are ready to pay for similar properties.
Income Method
The income method calculates the value of the given property by referring to the income that the property is capable of generating or producing. This method can be applied to the real property which generates the rental income, i.e. residential or commercial space, and any other property which generates income. To find how much it may generate, you’ll want to do the following:
- Establish the projected cumulative income from rent per year
- Deduct losses due to vacancies or for any other reason
- Subtract expenses including maintenance costs, insurance, utility bills, etc to arrive at the net operating income (NOI)
- Look for the cap rate, it is the rate of return that investors expect from property
- Put the NOI over the cap rate.
The Cost Method
The cost approach evaluates property based on the notion that it would cost to replace the same property. This consists of assessing the cost to purchase the plot to build a house of the same worth (manpower payroll and wages, construction cost, building material cost, lawyer’s fee, and insurance).
Suppose, if the labor and material cost to build a house is $300000 and the land cost $40000 then the original value of the house is $340000.
The Importance of Calculating Property Value Accurately
Accurate property valuation underpins good real estate investment because it is the foundation for several things that affect your investment, such as:
Evaluating Your Prognosis for Return on Investment (ROI)
Real estate investors should educate themselves on the ways to value a property in the market. This way, they can make good decisions about when to buy or sell a property or lease it out.
A cap rate is a rate of return on investment based on the current value of that investment, with an adjustment for the property’s net operating income. Property value growth calculators like Citadel always make sure to give you accurate property value for evaluating ROI.
Securing Financing
Lenders use property valuations to understand the amount of money that they need to lend you, and thus you have to be very careful when estimating property value.
Overall, an appraisal means a property may be accorded a high value with an implication of more loan offers/increased borrowing facility. An accurate appraisal is also useful in custody by avoiding over-lending, the lending value of the asset that is, shielding the lender from high risk in case the borrower defaults.
Determining the Purchase Price
If you determine the property value properly when you’re purchasing property for investment, you will be in a position to know whether the particular price that the seller is demanding is reasonable depending on the true worth of the home.
Likewise, in case you want to sell your home, through a property valuation you get a fair market value for pricing it right allowing no compromises on your chances to make the most out of your home sale.
Conclusion
Real estate investment is a good source of making money. So, if you’re investing in a property should know the valuation methods. If you are willing to buy, sell, or lease a property you should be concerned about the costs such as comparable sales, rentals, or replacement costs of the property. Or simply use a property growth calculator.