How to Value Your Real Estate Assets

Property valuation (or appraisal)of your real estate assets is a keyaspect of property investment.It’s important in the purchaseand resale of a property, but also

for insurance and financing purposes for the timeyou own the property. Understanding the valuationprocess allows you to assess and place anappropriate value on your property.

Cost Approach:

This is based on the concept of objective value(also known as “the cost to create”). Costapproach is particularly useful when the subjectproperty has been extensively renovated ornewly constructed. The main stages of the costapproach to value are:

• Estimation of the value of the site and itsreproduction cost, sometimes mistakenlycalled “replacement value”. In some cases,replacement value is the only accurate figureyou can use, along with an estimate of theaccrued depreciation associated withstructures on the property.

• Adjustment of the property’s value is determined by subtracting the estimate of accrued depreciation from the estimate of the reproduction cost (or replacement value, when applicable).

• Market value estimate is calculated by taking the adjustment figure from the step above and adding the estimate of the value of the site.

Sales Comparison Approach:

The sales comparison approach isperhaps the most commonmethod of determining the value ofreal property. The estimation of theproperty value is based on recent

sales data for direct comparables sold in the area inthe past six to 12 months. Real estate agents often usethis approach in larger markets where there are anumber of similar properties, as this valuation methodaccurately represents the market value of theproperty.

Income Approach:

This is commonly used to determine the value of an income-producing property where there is a relationship between the income a property is capableof producing and the value of the property. The main steps in calculating the value of a property using the income approach are:

Estimation of potential annual gross income.Using a motel as an example,the potential annual grossincome is the dollar value thatcould be realized if every roomwas fully rented at the highest

rate every night for the entire year. A vacancyand bad-debt allowance, based on currentmarket conditions, is subtracted from this figure,which becomes the effective gross income.

• Estimation of annual operating expenses. This is a figure that is often determined by calculating the operating expenses applicable to the majority of similar property types in the same marketplace. This includes industry-standard expenses, such as telephone, Internet and cable services, as well as fees for regular utility and seasonal maintenance. The annual operating expenses are deducted from the effective gross income to provide an estimate of net operating income.

• Capitalization rates are determined when thevaluator converts the income of a propertyinto an estimation of the future cash flowcompared to the return on the initialinvestment. These ratios are usually expressedas a percentage of the expected return onyour initial investment.

Randy Bettwww.BetterGroupRealEstate.ca