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An In-Depth Guide To Property Valuation

By Brian Chesson

A real estate property is worth what someone will pay for it. Knowing how to calculate your property’s value is important, especially once you decide to put it up for sale.

Property valuation determines the economic value of a property. Such a value is based on various factors, including location and its current state. A professional surveyor visits the property, records notes, takes its photos and then sends you a copy of the valuation report.

Getting your property assessed is crucial whether you’re buying or selling your property. In addition to understanding the fair market value of your house, it’s also essential in calculating the taxes related to it.

How Property Valuation Works

You can calculate a real estate property’s value based on the worth of all its potential benefits in the future. Unlike most consumer goods where you need to consume them immediately, you’ll only see a property’s benefits over an extended period. Therefore, it would help if you consider the economic and social trends to estimate the property’s value. Additionally, the environmental conditions and governmental controls that can affect such a value must be factored in.

When assessing a property’s worth, you should think about the demand for ownership within the community. Other factors to take into consideration are the utilities in your property and the number of properties available nearby. The ease of transfer of ownership rights can also affect the value of your property.

Methods of Property Valuation

Five generally accepted methods can be used to conduct a property valuation. These are the comparison, profit, residual, contractor and investment methods.

Comparison method

The sales comparison approach refers to the method of valuing single-family real estate properties and lands. It’s also an estimated value that compares the house with other sold properties that share the same features.

When making a sales approach, you need to have at least three variables in the appraisal process. A few of the most common factors are the size and location, which significantly influence the property’s market value.

Profit method

You can use the profit approach when you have no other properties on sale to compare it with. This is often the case for pubs, nursing homes and hotels. Such a method can also provide you with a ballpark figure of a business’s earnings, excluding all the working expenses. It involves the estimation of gross annual income or turnover less the operating expenses and cost of sales.

Residual method

The residual method is suited to assess the value of any real estate property with developmental potential or vacant properties that can be developed into something profitable.

When using this method to compute the land value, the gross development value is deducted from the development costs. The resulting residual value is the capital that the developer can use on the property.

Contractor’s method

You can use the contractor’s method particularly when you can’t use either investments or profits as a basis for your computation. It’s a cost method of valuation. This approach estimates all the possible expenses of rendering a modern equivalent real estate property.

Investment method

The investment approach determines the freehold or leasehold interest in a property from its capacity to generate future income. This method is commonly used in assessing the market value of the primary forms of properties where a tenant provides the landlord with earnings based on the landlord’s capital cost (the amount paid for buying the building).

With this approach, the comparable property transactions of lettings and sales are examined to obtain the revenue. The profit is then applied to future rental income, which you need to discount back to the current day. It will result in the net present value, which indicates the present value of the building.

Calculating the Capital Value of a Property

Investors should work with brokers and real estate agents to get an idea about income property valuation methods. Understanding the valuation method and how to combine it with income and capitalization rate is important to help determine a property’s current value.

When buying a property, the operating costs and revenue must also be considered to know if a particular property can meet your revenue goals and your expectations. To calculate the property value, the subject property’s net operating income (NOI) must be established first. For instance, a rental property’s NOI is the rental fees minus the expenses. You can then determine the net rental revenue after knowing how much you spend in maintaining it.

If you need someone to help you with your property investment valuation, our agents at Ray White Balmain can help you. Book a free appraisal with us today.

Understanding the Yield in Property Valuation

For many property investors, the key to their success is an intelligent analysis of their investments. Aside from learning about the real estate market, they are well aware of the factors that add real value to a particular property.

Return on investment (ROI), otherwise known as property yield, is an essential aspect of any property investment process. You can compute the yield on a property as the yearly return for capital investment, which is commonly expressed as a capital value percentage.

The three different types of yield are the following:

Gross yield: Gross yield refers to the income return on property investment before deducting the expenses. You can calculate the gross yield by dividing the real estate’s yearly rental revenue by the property value.

Net yield: Net yield refers to the investment’s income return after deducting the expenses.

The operational costs for running a property play a crucial role in its earnings. These costs include the transaction costs, maintenance fees, insurance and management expenses.

To compute the net profit, the yearly operating expenses of a real estate property are subtracted from its annual rent. The sum is then divided by its property value.

All risks yield: All risks yield is essential for those planning to invest in a commercial property. This type of yield is the same amount that property valuers and chartered surveyors use to determine the risks connected with particular investments.

We Can Help You

Real estate valuation comprises various strategies that need thorough understanding. If you’re looking to sell your home, you should search for an agent to value your property. Although online tools are now available to help you determine how much your property is worth, these tools won’t see your property from the ground. Agent valuations provide better accuracy as they don’t just combine data from different websites. These valuations include local insight or human input.

Do you want to ensure that you are in the best position to sell your property for its value? We, at Ray White Balmain, can help you provide the most accurate valuation for your property. Call us at +61 (2) 9810 3476 now.

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