How to valuate real estate as a property trader
Beginning property traders tend to struggle with the valuation of property, real estate in particular. Because how much is the property actually worth? How can I rightfully predict the profits of my real estate investments?
Property valuation is simply defined as determining the worth of your property based on data. There are a few ways to valuate real estate. These will be explained in this article.
Real estate valuation methods for property traders
Although valuations of properties are usually done by professionals, it is also possible to perform an analysis yourself. The following three common methods are used: the comparables approach, the income approach, and lastly, the costs approach.
The ‘comparables’ approach determines the value of a property by analysing comparable properties (hence, the method name). Logically, if an identical building is nearby, then this may be a good indication of your property's value.
However, it is also often the case that there are no identical properties. For this reason, similar properties are used as a benchmark.
The second valuation method, the income approach, is typically used to valuate commercial real estate or rental buildings. This is because their value depends on how much (net) income they can generate. Therefore, these properties are valued based on their income potential.
To determine this estimate, the tool of direct capitalisation is applied. This is done by determining the net operating income and then multiplying this number by a similar properties’ capitalisation rate.
The last method is an alternative for when there are no comparable properties available. This property valuation method considers how much it would cost to buy the land and build the property. These numbers are usually estimated by looking at similar land sales and construction costs.
More advice for a property trader online
The methods discussed seem easy in thoery. However, for a property trader online, it might be difficult and time-consuming to do these calculations yourself.
Luckily, there are enough other tools and organisations which can help you out with this problem. At Property Traders, we aim to provide the best insights into your property’s value based on our data analyses. For more information on this, go here.