How to do real estate Valuation ?

Valuation of Real Estate Property

Private Equity real estate investment

We do valuation to determine the fair value of a property based on:-

📁 Performance appraisal: - Performance appraisal is an estimate regarding the value of a particular property as on specified date.

 It is based on specific data, covering details regarding the particular property, pertaining to the nation, region, city, and neighborhood wherein the property is located. The goal of an appraisal is to determine a property’s “Market Value".

                          

Calculation of Market Value by using:-

Sales comparison approach

Here we identify similar property based on location, Age, Size, Condition of that particular property.   Step:-1 Identify a similar property. (Calculate per-square feet value of that identical property). Step:-2 Than adjust this per-square feet value for the difference in Age, size, location, etc. Step:-3 Now use the adjusted value (of step:-2) to calculate the value of subjected property.   By multiplying the adjusted value with the size of the subjected property.

Cost approach

It is used in case of new construction. Where similar property are not available.     Step:-1 Market value of land :-                      *** (+) Step:-2 (+)Cost of Construction :-                 *** Step:-3 (-) Depreciation or Obsolescence :-  *** _______________________  Value                                              :-   **** _______________________

Income approach

It is used for commercial income producing property.   Two ways to value a property:- Method:-1 Income Capitalization Approach:- Value of property: Net operating income           ÷ Capitalization rate   Method:-2 Discounted cash flow approach:- Value of property:- Present value of future cash inflow:-*** (-) PV of future cash outflow  :-         *** ___________________________________  Value:-                                               *****

All of the above 3 Approaches are used for different source of data & have different assumptions.

So, value would be different in each approach.

💢If property market is active and comparable are available (think apartment building) Sales-comparison approach is preferred.

💢If it is an income producing property and rate of return required by a typical investor (Kc) can be reasonably estimated, we prefer Income approach.

💢Cost approach would be used more as an exception, whether other 2 approaches can not be used And where property is unique and it is a recent construction.

Public Equity real estate investment

REITs (Real estate investment trust):- it is like close ended mutual fund traded on the exchange. it is holding a large no. of income producing properties. financed only moderately by debt.

NAV(per unit)=  {Value of the properties (+) other assets(-) Total debt }  ÷ Numbers of units of Reits.

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