Real Estate or Land has become an
investment vehicle that has held its value over time against the
falling value of money held as savings.
Most people require only
a job with a steady stream of income to get their their first
loan from a bank or lender, and this allows them to place their
first foot in the real estate market.
Residential Real Estate
The legal arrangement for the
right to occupy a dwelling is known as the housing tenure. Types
of housing tenure include owner occupancy, Tenancy, housing
cooperative, condominiums, public housing, and squatting.
Variants include timeshares and cohousing.
Commercial Real
Estate
In the last few years investing in
commercial real estate, such as
shops, offices and other business
premises has become an option for a
much wider range of people.
Land
Land is becoming a popular
investment vehicle because it holds
its value over time favourably
compared to many other asset
classes, such as shares or cash in
savings. In Britain and in many
other countries, agricultural land,
for example, may also be an
investment vehicle for those wishing
to reduce their tax liabilities
while they are alive and after they
have died.
Fair Market Value
Before an investor puts money down,
he seeks to establish a fair market
value. Fair Market Value is the most
probable price a property should
bring in a competitive and open
market under all conditions
requisite to a fair sale, the buyer
and seller each acting prudently and
knowledgeably, and assuming the sale
price isn't affected by undue
stimulus. The investor will try to
buy the real estate (1) below its
market value and/or (2) below its
estimated future market value and/or
(3) at a price which will provide
the investor with a positive cash
flow after all the expense are paid
for.
Methods Used to Estimate Property
Values
The four most common methods used to
estimate property values are the:
1. Comparison Sales Method:
The comparison sales method bases a
property's value on the recent sale
prices of properties that are within
the same area and comparable in
size, quality, amenities and
features. This is the method
favoured by estate agents.
2. Income Method:
The income method is used to
estimate the value of an income
producing property based on the net
income the property produces. The
income method value is calculated
using a:
(i). Capitalization Rate - The
capitalization rate, or cap rate, is
calculated by dividing a property's
annual net operating income by its
purchase price.
(ii) Gross Rent Multiplier - The
gross rent multiplier, or GRM, is
calculated by dividing the purchase
price by the property's monthly
gross operating income. This
approach is used by investors who
buy to get positive cash flow.
3. Replacement Cost Method: The
replacement cost method of
estimating a property's value is
based on the cost of replacing the
improvements on the property minus
the cost of the land to estimate a
property's value. Replacement costs
are calculated on a per square foot
basis by dividing the total number
of square feet in the building by
the per square foot construction
cost. For example, a two thousand
square foot convenience store that
cost £375,000 to build would have a
replacement cost of £187.50 per
square foot, or £375,000 divided by
2000. This approach is used by
parties, such as insurers, concerned
with the actual costs of replacing a
property. In many older properties
or properties that would be
difficult to rebuild, the
Replacement Costs may be far in
excess of its Comparison Sales
Price.
4. Development
Potential Method:
Some land and property will have a
value that reflects its development
potential, and this may be far in
excess of its present fair market
value.
Property Development
can
yield spectacular returns. However,
assessing development potential is
often more of an estimate, rather
than a calculation. Usually, the
buyer hopes to acquire the land or
an option to buy the land at a price
which affords a margin of safety.
Therefore, if the anticipated
development potential is never
realised, and the property is never
developed, the developer may be able
to sell the land without making a
loss.
Real Estate