Measuring Value and Performance of Investment Real Estate

“Investment value” is what an investor is willing to pay for a property. Investment value is unique to each individual investor, depending on the perspective, risk tolerance, and objectives of the investor. Investors typically are interested in cash flow performance.

As property prices continue to rise, appreciation becomes a factor in valuation. But appreciation is speculative in that a “possibility” may exist for the property to increase in value during the holding period. Without a crystal ball to see the future, appreciation is less easy to measure and must be predicted as a statistical “probability” based on historical trends in a given market place or location. We’ve all seen appreciation occur in growth markets. But to be a successful real estate investor you need more than luck of being at the right place at the right time. Savvy investors view appreciation as a “bonus” and not a good measure of valuation for investment property.

There are many ways to value real estate such as comparing sales prices of similar properties, looking at rents, and analyzing cash flows. These give an investor a feel for market trends.

Comparative Sales: In the comparative sales method often a price per square foot or price per unit comparison is used. But this approach is limited because it disregards the income and expenses of the property. Moreover, certain specialty properties may not have any direct comparables.

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