Property valuation approach is defined as the method through which you calculate the cost or value of a property. It factors in different parameters like location, type, connectivity, etc, to find a property’s worth. Here are the three most common approaches used while determining the net cost of a real estate:
1. Sales Comparison
This approach is primarily used for residential real estate and land. This method is purely based on market data. As the name suggests, the target property is compared with resembling properties in reference to the selling price. The term ‘resembling’ is generally defined as the properties that are similar in terms of selling age, age, area, developments and other parameters. The resembling properties are called comparables.
2. Cost Method
This approach is used for properties which are usually not sold. For instance- government buildings, schools, hospitals, etc. In layman terms, this approach clearly works on one objective: the cost required to construct a similar property to target property ‘A’ must not be higher than the selling price of rental property ‘A’. Factoring in the depreciation per cent into the calculations, the cost to build the property is calculated.
3. Capitalization of Income
Usually applicable to both commercial as well as residential properties, the worth of a real estate is calculated on the basis of two things: Net property income (NPI) and Return on Investment (RoI). This has two sub-sections: Gross Income Multipliers and Direct capitalization. However, this method is used less in comparison to the two mentioned above.
If you are an investor or about-to-be landlord, it is always advised to be aware of the above-mentioned methods so that you can understand the market better when the time comes.