Oct 26, 2019
Do how to properly value a property? I know a lots of people don't know much about it. That's one of the questions I get quite frequently and I thought I'd talk about that today.
The first thing that you need to consider while determining the value of the property is to find out whether the property is residential or commercial.
Four units or below are considered residential and they are valued a lot differently than a commercial property. One of the ways to find a value is to get an appraisal. The other way is to get a market comparable done for you by a realtor. This approach is simply a comparison of similar homes that have sold locally over a given time period.
You also can get an appraisal value after repair if the property needs a lot of work. It costs you a little bit extra but will solve your purpose if you need financing.
Those are the most popular ways to get a valuation for the residential properties.
And when it comes to the commercial property it's a different story.
Most of the time people are ready to make an offer or are getting ready to make an offer but they don't have all the numbers up front for the property. So you can't make a really good offer and many end up losing the deal.
So I remind all my students to get the property under contract and make an offer since that offer is negotiable till you remove the conditions from the contract. Get it under contract even if you need to give an asking price or the over asking price.
Once you have the property under contract then you can ask for all the financials. Once you have the financial information, you can now look for the net operating income (NOI). I would suggest that you take the financial numbers for at least 3 years for any property and see what the net operating income is.
A lot of time, some property owners do a lots of renovations or maintenance and the NOI can be misleading. Alternatively, you also need to take a look for the deffered maintenance since some property owners have not been taking care of their buildings and so you need to make sure that you're not over paying for that property.
Always analyze a few properties even you're not buying them so you get to know the net operating income which will support the mortgage payments and gives you the positive cash flow.
There's also a Cap Rate that you may need to consider but it's not the major factor that I look for.
There isn't a one-size-fits-all solution, so a combination of these factors may need to be applied. Investors can use the sales comparison approach, the income approach, and the cost approach to determine property values.
So determining the cost of and the return on an investment property are just as important as figuring out its value.