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SHOW NOTES FOR EPISODE 052 – WHAT IS THE PROPERTY WORTH?
Introduction
In this episode, Bill discusses how to assess a property’s value. He takes a unique approach by actually sharing the three main valuation methodologies as they are included on an actual property appraisal he has received. You don’t want to miss this podcast because this is one of the most critical aspects of real estate investing directly impacting your success as an investor.
In that this episode is more of an overview, Bill references his three-part podcast series entitled “Analyzing Rental Properties” for those who are interested more in the specific valuation ratios and equations that go into property value assessment. Those episodes are:
- episode 036 – Analyzing Rental Properties – Part 1
- episode 040 – Analyzing Rental Properties – Part 2
- episode 042 – Analyzing Rental Properties – Part 3
Bill recommends that you get a hold of an actual appraisal to see how a professional appraiser comes up with the value of a property.
The appraisal also has excellent information on:
- Market analysis
- Property details
- The city and community
The Three Main Valuation Methodologies
- Cost approach
- Sales approach
- Income capitalization or income approach
Cost Approach
- Land and structure value to replace (can be much more than appraised value)
- This is the insurance coverage amount
- What it would cost to construct the same property today
- Your local county also determines land value and structure
- Includes value of the land and entrepreneurial profit
- Typically not used for apartments but insurance companies will use this calculation for apartment policies
Sales approach
- Examines like properties and adjusts value based on similarities and differences
- Used mostly for single family homes – called “sales comps”
- Average cost per square foot
- Adjust for condition of prop, amenities (fireplace, swimming pool, 2-car garage, etc.)
- For multis – NOI column helps compare profitability-per-unit
- Best if measured comparatively on a square foot basis
Income Approach
- Based on anticipation which recognizes the present value of the future income benefits
- Applicable to investment properties
- Present Value equals annual income divided by market interest rate
- Determined by ROI, cap rate and often other ratios
Free 3-Minute Rental Property Analyzer
- Available at olddawgsreinetwork.com
- The Analyzer generates a quick property value number after you input key amounts
Key Ratios You Need to Know First
- Gross Rent Multiplier (GRM)
- Cap Rate
- Net Operating Income (NOI)
Summary
- You must develop a comprehensive understanding of value
- Don’t just assume your broker knows the right price – you need to figure it out yourself
- Knowing the value gives you leverage in negotiating with sellers
- Get “good numbers” to get an accurate assessment
- Do your homework and conduct the research necessary
- Check county property sales records
- Ask your broker to compile a list of recent sales of similar prroperties in the area
- Do a rent survey
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Get a FREE copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.
Episode Sponsor: Meno Studio – menostudio777@gmail.com
