In the current climate, a lot of investors find it tricky to value property investments given that comparable sales are few and far between. Here is an easy system that you can use to value any investment, not just property investments.
Let's start by thinking about why you invest. You invest because you have some extra money today and instead of using that for consumption purposes today, you choose to invest it in return for the possibility of having more money in the future.
'More money in the future' is a result of two things - income produced by the investment and gains in the capital value. The income part of the equation leads to a stream of cashflow over time and the gains build up and can be released by selling or refinancing the asset.
When looking at any investment then, the question that must be answered is "how much income is this investment likely to produce over time and by how much is it likely to go up in value?'
To work out the expected return, you take the expected stream of cashflow and gains and 'discount' them back to work out the value in todays money. Why is discounting important? It is important because tomorrow's money is worth less than today's money due to inflation.
So instead of valuing a property investment as a house, value it like a business - something that produces cash over time along with an expected gain in value. This is then discounted back to get 'present value'. If present value is more than what you are paying for the investment then you would make the investment, and if not then you wouldn't.
The tricky bit is figuring out how much cashflow is likely to be generated over time and what the gains will be.
The video above explains some more about this. I recommend that you spend some time learning about discounted cash flow analysis, it will help you value any property investment.
by Parmdeep Vadesha
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