Assessing your real estate property’s value is important, whether you’re thinking of selling or not. Knowing the accurate price of your property will allow you to assess your current standing in the market, determine if your value increased since you bought the property, and more, accurate valuation is necessary.
Moreover, while you can hire a leading real estate company like IPS Cambodia to appraise your property, it’s still better that you understand how proper valuations work. This way, you can determine that your property value has been computed properly. With this in mind, you need to know the five best valuation computations in the market as elaborated on below.
1. Using GRM
One of the most common valuation methods in the market is the Gross Rent Multiplier (GRM) computation. This determines the value of the property depending on the rental profit that investors can make from it within a year.
To determine the GRM, you need to know two things: the property price as well as the gross annual income (GRI). The GRI is the total yearly profit a property makes as well as any additional income it can produce. For example, if you buy a property with four units you can lease out, then you need to factor that into the possible GRI too.
To start your computation, the GRM formula looks like this:
Property price / GRI = GRM
For example, if you have a property worth $100,000 with a possible $20,000 GRI, following the computation above, the GRM is 5. Take note that the lower the GRM, the higher is the potential return of your investment.
2. Using CAPM
To get an accurate pricing on your property, factoring in the risks involved of investment as well as other opportunities, then you can use the Capital Asset Pricing Model (CAPM) formula. In order to get the expected return, the CAPM compares the possible return using risk-free rate and the market risk premium.
The formula looks like the following:
Risk-free rate + (Beta x Risk Premium) = Expected Return
Once you make the calculations above, take note that if the expected return on a risk-free investment is higher than the possible profit on a rental, then it’s best not to take on the responsibility of buying a rental property. On the other hand, if the expected return is high after factoring in the risk-free investment and considering the market premium, you can push through with your investment.
3. Using SCA
The most common computation used in valuations is the Sales Comparison Approach (SCA).This simply compares the value of a property compared to the recent market value posted regarding other similar properties. However, take note that other properties should actively be in the market for the SCA model to work since the most current value is necessary here.
All the factors regarding the property you want to compute need to be considered here, although it mostly has a relative price value. For example, depending on the number of bedrooms a property has, if it has its own pool, jacuzzi, office and more, the price can be added on to or lessened. For comparison, if the property as well as the amenities included isn’t similar, then an accurate value using SCA would not work.
4. Using Cost approach
If you want to factor in depreciation, which is how much the value of a property lessens over time, then using the Cost approach is the right formula for you. In this case though, you also need to know the separate value of the land that the property stands on since it’s one of the factors in the computation. Moreover, you have to know the costs of building that property (materials, manpower, etc) or the cost of repairing items/segments of a property you want.
The formula looks like this:
Land Value + (Cost New – Depreciation) = Property Value
Since the cost approach does not use current market factors, it’s one of the most accurate methods to use especially for unique properties.
5. Using Income approach
The investor is prioritized in the income approach since its computation focuses on the capital investment and the potential profit. In this case, you have to know the yearly capitalization rate which is the possible rental yield of a property within a year. However, this is only based on the assumption that the property was purchased using cash and not a loan.
While the income approach is often used for the valuation of commercial properties, you can also use it for residential properties you plan on leasing out.
The formula looks like this:
(Expected monthly income x 12 months) / Property value = Capitalization rate
For example, if you have a 2 bedroom house worth $150,000 and an expected monthly income of $2,000, then the annual rental income would be $24,000. Given these numbers, the yearly rental yield would be 16%.
Make sure to review the numbers and formulas correctly in order to get the most accurate price for your property or rental. However, if you need more help in determining the value of your property, then hire a trusted real estate company like IPS Cambodia!