Valuation: Part 'Art' and Part 'Science'
Real Estate Valuation not an exact science. There is always some uncertainty and ambiguity when arriving at the Value of a property. Conventionally there are 3 methods to value a property 1) Cost Approach 2) Income Approach 3) Sales Comparison Approach
All these approaches use some assumptions and estimates and hence valuation is not an Exact science. However, putting that aside for a moment the most important questions to ask when valuing the intrinsic value of a property are
1) What is the net annual rent that the property fetches now?
2) What is the expected growth in rentals over the future years ?
The first question often measured by a factor relative to the sale price is called the Net Rental Yield. The first question which is the net annual rentals is adjusted to the Sale price in a factor called Net Rental Yield which will give you the NOW snapshot of your investment This can be calculated precisely and is the Science part of INVESTMENT. The second question what is the expected growth in rentals is an ESTIMATE which is the Art part of investment.
The Genius in Investing in Real Estate involves the second part and your ability to anticipate future growth in rentals of the property which would reflect in the leapfrogging of the INTRINSIC VALUE of the property. Many Millionaires and Billionaires have made their wealth by dabbling in the art part of investing in Real Estate and recognizing the future potential of Real Estate Plots. The ability to spot early on fast growth properties in fast growing micro markets is KEY. Ray Croc the founder of McDonalds once asked a young group of people what business they thought he was in. They all said "The food business ofcourse". Ray Croc shook his head and said well 'NO' actually I am in the Real Estate business. Ray Croc was an artist who understood the 'art' part of investing in Real Estate He often bought up corner plots in important intersection knowing they will grow in value with his business and as the city develops. He leased it to the fanchisee owners who paid for it by running their establishment. Such was his genius. Years later these plots formed a significant part of the balance sheet assets of Mc Donalds.
Successful people are able to dabble successfully in the 'Art' part of investing. Fortunes have been made and lost by those dabbling in this 'Art'. For a more detailed understanding do read the 'THE REAL DEAL' and 'NUGGETS of WISDOM' by A.Venkatasubramanian Donot forget to Visit www.therealdealbook.net