How to Determine the Value of Investment Property

Investment property is generally defined as property bought by investors in order to generate long-term returns on investment, i.e. property purchased with a view to generating future income and not for self-accommodation. For a wise and savvy investor, there are several conditions which must be fulfilled before any money investment is made and if you’re a novice investor, it would behoove you to keep in mind, the guidelines which follow. Before determining the value of investment property, it is essential to know why do you need to invest in property.

Why Invest in Property?

Investing in property is beneficial in many aspects.

• Property is a long-term asset which appreciates in value over time and guarantees returns for the investor. Moreover, it is a stable investment and not prone to frequent volatility.
• Additional income can be generated by investors by leasing or renting out property for residential or commercial investors.
• Tax deductions are available for investors who have borrowed money to invest in property. The difference between income earned from the property and the loan interest payable (when the latter is higher) can be deducted from the income assessed for tax.

Determining the Value of Investment Property

“Caveat emptor” (buyer beware) is a simple commercial philosophy applicable to anyone spending their money. Determine that you are getting the maximum value for your dollar, by evaluating the property in question; is the property worth the money you’re expected to pay? This can be done by three methods of valuation, described below.

• Market Data Method or Comparative Market Analysis: Fair Market Value (FMV) is obtained by comparing the property in question against comparable properties of the same type, i.e. similar properties sold in the preceding one year; where location, size, condition, age etc, are as close to or similar as the property you are valuing.
• Replacement Cost Method: This method works on the assumption that the investment property being valued can be replaced or recreated as a new piece of property. This method is used to value one-of-a-kind properties, where the first method cannot be applied. Replacement cost is calculated as: present costs for replacing the property (A) minus estimated depreciation accrued over time (B), plus the estimated current value of the land (C) - (A-B) +C.
• Income Analysis Method: This method calculates the future income the property can bring in, based on rental income or future sale price. Two variables – Gross Rental Multiplier (GRM) and Capitalization Rate (CR) – are used to determine FMV. GRM of similar properties over a prescribed period (12 months usually) is taken as an estimate of the potential income probable from the property under consideration. CR is a variable used in determining the FMV of large-scale properties – annual returns generated by similar properties in the nearby area is taken as the estimated value.

The methods of valuation discussed above and the listing of benefits in buying investment property should help you decide whether putting your money in property is a good idea.