How to determine your apartment’s worth: 5 pro tips for success
Assessing the value of your investments is a crucial step that will invariably lead you to making sound decisions in the future. One such investment is your apartment space and if you ever have to sell or rent it out, then knowing how to determine its worth will help you attract the right people. Penned down are 5 ways to go about this.
Sales Comparison Approach
Abbreviated ‘SCA,’ the Sales Comparison Approach involves factoring in units that have been recently sold over a specific timeframe and making logical comparisons. Also, termed the “price per square foot approach,” the SCA zones in on the nitty-gritties of an apartment such as the lot size, number of bedrooms and bathrooms, similar square footage and its age. Important to keep in mind is the fact that the SCA valuates all properties the same way, including currently owned units and investment properties.
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Cost Approach
Often resorted to when a property in question isn’t necessarily generating any income or when it is difficult to find recent sales figures, the Cost Approach is divided into two valuation methods. Namely replacement and reproduction. If choosing the replacement method, then you will be called upon to assess the cost of new materials, existing construction techniques together with an updated floor plan of the unit. On the other hand, with the reproduction method, you will be found valuing your rental property based on the cost needed for reproduction, the desired furniture and the floor plan.
Income Approach
With reference to the Income Approach, all what you need to remember is the value of your Net Operating Income or ‘NOI’ for short. The mentioned approach takes into consideration your unit’s NOI and compares same with the purchase price. Know that the NOI figure must only include general property operating costs. Therefore, your NOI earnings will not cover any depreciation expenses, repair costs, interest payments or mortgages. Called the “cap rate approach,” the Income Approach successfully determines the worth of your unit by relying on the following: the 1st year of the NOI is divided by the price paid for the unit that will give you your percentage return. Importantly, the higher the rate of your unit’s cap rate, the greater and more lucrative the investment. However, as an investor, you could also look at increasing the rent of your unit with every passing year and ensuring that you keep your operational costs in check. This way, you will be better positioned to gradually make increases to your NOI value, beginning at a lower cap rate.
Capital Asset Pricing Model
On the subject of assessing your apartment’s worth based purely from an income standpoint, the Capital Asset Pricing Model (CAPM) will easily be the most complicated of them all. Fundamentally, the CAPM approach details the subsisting relationship between the risk of investing in an asset and its returns that you can expect. If you are confronted with having to determine your unit’s worth using the CAPM method, then you will need to take stock of a number of features. These are the location of the unit, its age, condition as and when the valuation is conducted, operating expenses, net cash flow and the potential rental income.
Gross Rent Multiplier
A simply means of determining a unit’s market value is to adopt the Gross Rent Multiplier (GRM) method. No sooner you find the existing market value, divide the value of same by the gross annual rental income rate. By utilising this approach, an investor like yourself will have a fair idea of the number of years that it will take to pay off the apartment based on the value of your gross cash flow. In conclusion, even if you want to buy apartment in Colombo, such as those on offer through Prime Residencies, then having a good understanding of any of these 5 approaches will aid you in arriving at a well-informed decision.
