06.24.21
How To Effectively Assess The Value Of A Potential Investment
The real estate industry is a highly competitive market. Deciding what properties are worth your investment can be difficult, especially for newer investors.
Thankfully, with the current technology and digital tools available to real estate professionals, the value assessment process is easier than ever before. That’s why a panel of Forbes Real Estate Council members shared the most effective ways to assess value for a potential investment. Follow their advice before you take the plunge on a real estate investment.
1. Take A 3D Virtual Tour
Investors should leverage technology to streamline the due diligence period and accurately assess the value for a potential investment. Investors should utilize digital tools such as a 3D virtual tour to immerse themselves in that property in a real-life way without wasting time and money sending a team to analyze the investment in person. – Kori Covrigaru, PlanOmatic
2. Determine Your Potential Income
For commercial real estate, the income approach is best. Figure out the income (revenue minus expenses) of the property and divide that by the cap rate. The lower the cap rate, the higher the property value. A local broker can help you identify the cap rate for the area where the property is located. – Kent Ritter, Birge and Held
3. Consult A Real Estate Agent
First and foremost, align yourself with a real estate expert who has the knowledge and experience to help you look at opportunities and show you how to calculate the ROI of the project. A realtor can look at historical data and current data to come up with the current market value and potential upside or downside to a real estate investment. – Lisa Copeland, The Agentcy by Tarek El Moussa by Exp Realty, LLC
4. Consult Potential Buyers And Agents
The worst thing one can do when trying to assess value for a potential investment is assessing that value in a vacuum. To truly assess value, you need to consult those who would be valuing the property—potential buyers and their agents. Having an audience on social media, via email or even getting people together in person to discuss value for investments is the best and most transparent path. – Matt Weirich, Realync
5. Look At The Property Holistically
It needs to be looked at the same as any investment that you make. Real estate investment tends to have more emotion involved. Look at the history of the location. Look at everything the same way you would look at stocks. What are the city or community plans? What is the infrastructure investment in the location? What are the demographics? More importantly, you must look at the time series. – Mike Shapiro, Mike S Shapiro
6. Measure Your Internal Rate Of Return
If the opportunity is a heavy value-add, you should use an internal rate of return (IRR) to measure the value. If the property is more stabilized, cash-on-cash returns are more effective. – Lee Kiser, Kiser Group
7. Start With The Price Per Square Foot
It depends on many things including the market, the macro outlook and other factors. Nevertheless, we are value investors and are most driven by the price-per-square-foot metric. We shoot to buy buildings below market price, below replacement cost and ideally, close to the price of land alone. – Remy Raisner, The Raisner Group
8. Determine Your Cash-On-Cash Return
You can use fancy software that will help with analyzing other pertinent values such as an IRR or you can go as simple as writing it out on paper. I personally like to use Excel. Having a deep understanding of formulas showing how hard your money will work for you is crucial to assessing a good deal from a mediocre or bad deal. – Pam Scamardo, TPK Properties LLC
9. Consider The Yield And Your Financing Options
Is it positively leveraged? Calculate the equity dividend rate or cash-on-cash rate—the math may sound confusing, but it’s relatively simple. After looking at the yield with and without equity, assess what financing banks are willing to offer you. If the math makes sense, then it might not be a bad opportunity! This helps prevent emotional decisions; anyone can invest, so look at the yields. – Charles Argianas, Argianas & Associates, Inc.
10. Consult Local Planning And Development Offices
The city and county’s planning and development department is your friend. Learn which neighborhoods have upcoming retail and dining developments that have been approved for future builds, then search for inexpensive properties around the planned new development. Once the development is completed, your property’s value will increase significantly. – Mor Zucker, Team Denver Homes – RE/MAX Professionals
11. Calculate Realistic Income Projections
One of the most effective ways to assess the value of a rental property is to get a realistic idea of the income the property can generate. For an in-depth analysis, compare comps, solicit opinions from local property managers and utilize online tools like Rentometer. The 2% rule can give you a quick ballpark idea, meaning to ensure cash flow, one month’s rent should equal 2% of the sales price. – Tara Hotchkis, Compass
12. Project Your Future Cash Flows
Like a stock, the present value of an asset is the expected value of future cash flows, plain and simple. Google will return millions of hits on methods to derive and measure value, but there is little to suggest the relationship between current value and future cash flows isn’t a direct one. – Clark Twiddy, Twiddy & Company
13. Study Your Local Market
When assessing value for a potential investment, knowing your local market is crucial. Crossing one major road, highway or school district boundary could mean a significant difference in value. Understanding the boundaries for historic districts, opportunity zones or areas of gentrification is also key. – Melissa Johnson, webuyhousessanantoniotx.com
14. Evaluate The Room For Growth
For properties in resort areas which investors will prioritize appreciation and rental potential, it’s important to evaluate the room for growth. Is there room for future developments? What are the plans for developing infrastructures such as ski lifts and amenities? Once there is a clear understanding of the growth, analyzing historical data will help you make a value assessment for the future. – Marco Del Zotto, LIV | Sotheby’s International Realty – Breckenridge CO
