How to evaluate a real estate property?

by admin

Posted on September 7, 2017


Real estate property in Chicago

Investors who are interested to make more profit can opt for rental properties which is currently the best option to make your investment. Although there are certain protocols to evaluate a real estate property in Chicago with which the investor has to decide whether purchasing the property is worth or not.

The following are the protocols to value the properties for sale:-

Sales comparison approach

This approach is also known as SCA which is generally used by all investors to evaluate a property. Data is collected to make comparative assessment of similar properties that were purchased by other investors or given out for rent for a stipulated period of time. The data can be collected from various sources like real estate publications, buyers, sellers, agents, professionals. Appraisers will use amount/sq.ft to calculate the estimated price of the property. After calculating, the accurate return value is known. Ensure that the calculated value is accurate. But investors should think broadly before purchasing a property as there are several other aspects to look out for. It is based on supply, demand and principle of substitution and this method is commonly used by the agents and appraisers in real estate marketing in detroit. The SCA approach will help the seller to fix a price to display on the MLS.

Capital asset pricing model

This is a realistic approach that every investor will prefer while evaluating the real estate property in Chicago. It is also known CAPM model and used to calculate the cost of capital. The investors should know about the risks that he may come across while purchasing a property for sale, this method involves systematic risk and opportunity cost. The systematic risk is when entire finance system is down. E.g. recession. Unsystematic risk pertains only to an individual portfolio which can be prevented.

The method produces results that an investor can fetch from the monthly rental income, which is ROI (Return on investment) and assessed with investments that don’t involve risk. This is to ensure that investor make risk free investments. The potential ROI may differ as there are various factors to be included when you purchase a rental property. A theoretical appropriate rate of return is determined so as to decide whether it can make the portfolio well diversified or not. Non diversifiable risk is denoted by beta (β).

Income approach

It is an appraisal method. The net operating income of the rent is divided with capitalization rate or CAP rate to calculate the potential income. This method is the simplest of all and used by investors who are interested to keep the property for some time and make some money out of it. It is prevalent in commercial real estate marketing in detroit. This protocol is also known as discounted cash flow. It is used to calculate the anticipated monetary benefits. It falls under either of the 3 categories, direct capitalization, discounted cash flow, gross income multiplier.

Cost approach

Cost approach is an accumulative amount of land value minus amount spends for repair and renovation. It is used to calculate the current cost of a real estate property in Chicago. This method is preferable when the property is new.

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